2.4.4 exchange rates Flashcards
What is the exchange rate?
The weight of one currency relative to another.
What is depreciation?
When the value of a currency falls relative to another currency in a floating exchange rate system.
What is appreciation?
When the value of a currency increases.
What is devaluation?
When the value of a currency is officially lowered in a fixed exchange rate system.
What is revaluation?
This is when the currency’s value is adjusted relative to a baseline, such as the price of gold, another currency or wage rates.
What is the value of exchange rate in a floating systems determined by?
The forces of supply and demand.
What is a fixed exchange rate?
A value determined and manipulate by the government compared to other currencies.
How can a central bank in a fixed exchange rate system manipulate the exchange rate?
By selling or buying the currency to change the price to where they want.
What does depreciation in the pound mean for UK exports?
That they become more price competitive. Firms can then reduce the price of the good in the export market to increase sales, or they can keep the price the same to increase their profit margins.
What does a depreciation in the pound do if firms are net importers of raw materials?
Costs of production will increase as imports are relatively more expensive. This could make the firm less internationally competitive.
What does the effective exchange rate (EER) index describe?
The strength of one currency to a basket of other currencies using an index. The weighting of each currency is dependent on how important trade between the country and its partners is.
A change in pattern of trade causes a change in relative weight of each currency.
