Write short notes on the following:
Appreciation vs. Depreciation of currency.
Appreciation of a currency is the increase in its value in terms of another foreign currency. Thus currency appreciation takes place when there is a decrease in the domestic currency price of foreign currency. For instance, if the value of a rupee in terms of US dollar increases, say from र 50 to र 49 to a dollar, it will be called appreciation of Indian currency (i.e., rupee) because less rupees are required to buy one US dollar. This shows strengthening of the Indian rupee. So with same amount of money (Rupees), more goods can be purchased from US. It means imports from US have become cheaper. This may result in increase of imports by India from US. By contrast when Indian rupee in dollar terms appreciates, the dollar would depreciate. In short, lower exchange rate like $I = र 49 instead of र 50 means appreciation of Indian currency.
Appreciation vs. Revaluation. When a country raises the value of its currency in terms of foreign currency under a fixed rate regime, it is called revaluation. The effect of revaluation is the same as that of appreciation. Although both appreciation and revaluation convey the same thing, i.e., a rise in the value of domestic currency in terms of foreign currency but they take place in different regimes. Revaluation takes place by government order in Fixed Exchange Rate regime whereas appreciation occurs in Flexible Exchange Rate regime in a free exchange market depending upon forces of demand and supply of currency.
(ii) Depreciation of a currency is fall in price of domestic currency (say, rupees) in terms of foreign currency (say, dollar). It means one dollar can be exchanged for more rupees. Its implication is that with the same amount of dollars more of goods can be purchased from India. This means Indian goods have become cheaper for Americans. This may result in increase of exports from India to America. Thus currency depreciation takes place when there is an increase in the domestic-currency-price of the foreign currency. For instance, if the value of rupee in terms of US dollar falls, say from र 50 to र 51 to a dollar, it will be a case of depreciation of Indian rupee because more rupees are required now to buy one US dollar. In short, higher exchange rate like $1 = र 51 instead of र 50 means depreciation of Indian currency.
Clearly appreciation or depreciation occurs under flexible exchange rate system. The exchange value of currency frequently appreciates or depreciates depending upon the change in the demand for and supply of currency.
