Exchange rate – A
simple note to understand the concepts
Exchange rate means the rate at which one currency is exchanged for another currency.
For example
One dollar = Rs.65. it means, 65 Indian rupees are needed to purchase one
dollar.
Exchange
rate may increase or decrease automatically. Government can change the exchange rate deliberately
through policy measures
Increase
in the exchange rate is can be called Devaluation and Depreciation
Decrease
in the exchange rate is called Revaluation and Appreciation
Devaluation
– A deliberate increase in the exchange rate is called devaluation. When devaluation happens, the value of domestic
currency declines in terms of foreign currency.
For example, now authorities increased the exchange rate to $ 1 = Rs. 70. Here exchange rate increased. But
the value of home currency decreased. Now 70 Indian rupees are needed to
purchase one dollar.
Depreciation
– an automatic increase in exchange rate because of the change market forces(
that is demand and supply of foreign currency )is called depreciation.
The effect
of the depreciation and devaluation are the same. The value of home currency
declines. Both these reduces the volume of imports. So it helps to solve the
problem deficit in the BOT and BOP.
The opposite
of devaluation is Revaluation.
Appreciation is the opposite of Depreciation
Appreciation is the opposite of Depreciation
RATHEESH K K
PGT ECONOMICS
KENDRIYA VIDYALAYA DONIMALAI
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