ap macro study guides

6.2 Exchange Rates

#exchange-rates

#appreciation

#depreciation

โฑ๏ธย ย 2 min read

written by

jeanne stansak

November 15, 2020


6.2: Exchange Rates

Exchange rates are the price at which one international currency can be exchanged for another. In other words, it's the price at which one currency can be bought with another.

๐Ÿ’กWhen the exchange rate increases, it is more expensive to purchase currency. This makes goods and services from this country more expensive.
๐Ÿ’กWhen the exchange rate decreases, it is less expensive to purchase currency. This makes goods and services from this country less expensive.

Appreciation occurs when the value of a country's currency increases relative to a foreign currency. Depreciation occurs when the value of a country's currency falls.

๐Ÿ’กExchange rates between countries are reciprocals of each other, meaning that when one currency appreciates, the other currency depreciates.

Let's look at various currencies and their exchange rates to the U.S. Dollar and whether they have appreciated or depreciated:

Cost of One U.S. Dollar

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-MbVskb2vu7TG.png?alt=media&token=cc4bea3b-8a7b-4e40-bbbc-dbcf249e9d1c

If we look at the British Pound, we see that the exchange rate increases from .75 to .80 from March to July. This means that the British Pound has become more expensive or has appreciated in value.

If we look at the European Euro, we see that the exchange rate decreases from 1.10 to 1.05 from March to July. This means that the European Euro has become less expensive, or has depreciated in value.

We can also use the information above to calculate the price of a U.S. good in the various currencies. We do this by simply multiplying the price of the U.S. good by the exchange rate for whichever country we are looking at. So for example, a $300 hotel room in the U.S. would cost ๐Ÿ’ท225 pounds in Britain.

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