As someone interested in the field of finance, commerce, economics, and international business, it is quite common for you to bump into concepts that establish a linkage between these otherwise diverse fields of study. At Jagannath International Management School, one of the top colleges for PGDM in Delhi, we have often witnessed curiosity among students to get to know the world of exports and imports better while not forgetting to look at the various currencies that come into play in these cross-border transactions.
Today, in this article below, we at JIMS, one of the top b schools in Delhi, are going to shed light on the definition and impact of currency appreciation and depreciation, particularly concerning international trade. Read on.
Let’s Learn About Currency Appreciation
In simplest terms, currency appreciation has to do with one particular currency rising in value as compared to other currencies operative in the Forex market. Multiple reasons are responsible for currency appreciation, some of the top contributors being government policy, interest rates, trade balances, and business cycles.
A direct impact of currency appreciation is a reduction in inflation, which unfortunately hits local businesses operating in the territory. When a currency appreciates, imports become cheaper. This drop in prices lowers inflation as well. Amidst this, demand for local products drops, which makes it mandatory for local business owners to up their game, reduce costs, increase productivity, and gain a competitive advantage.
Similarly, when the currency appreciates, the export expenses rise. This, in turn, prevents the exports from getting the necessary push as the number of commodities exported from the said country show a persistent decline.
A Glance at Currency Depreciation
Currency depreciation is exactly the opposite of currency appreciation. In the case of currency depreciation, the exchange rate of the currency drops in comparison to the other currencies in the market. Some of the reasons responsible for currency depreciation are economic fundamentals, interest rate differentials, political instability, and risk aversion among investors.
If you see, currency depreciation has its own set of benefits. Primarily, a drop in the exchange rate of a currency is likely to help the said country in achieving its economic policy. Similarly, a relatively weaker currency is likely to contribute to a rise in exports, shrinkage in trade deficits, and a reduction in the cost of interest payments on outstanding government debts.
Having said that, unlike currency appreciation, currency depreciation leads to a rise in inflation. This happens mainly because imports become more expensive. There are ways in which currency depreciation can be controlled to some extent, which include the sale of foreign exchange assets, rise in interest rates, reduction in inflation, and introduction of supply-side policies to improve long-term competitiveness.
Impact of Currency Appreciation & Currency Depreciation on Exports and Imports
When a currency appreciates, it makes foreign goods look cheaper than the domestic goods. Precisely, currency appreciation leads to the purchasing power of the said currency increasing in the foreign markets, which makes it possible for that currency to buy an additional amount of foreign currency.
In this scenario, the local consumer is at a benefit because imports are on the rise, which ends up presenting the consumer with an increased choice of products. On the other hand, net exports decline, which impacts the domestic producers as domestic goods become more expensive in the foreign market.
Moreover, since the income of domestic producers declines, capital outflows increase, which leads to a decrease in aggregate demand in the economy. As mentioned earlier, currency appreciation helps to keep inflation in check.
However, in the case of currency depreciation, domestic goods appear cheaper, while foreign goods come across to be expensive. The purchasing power of domestic currency falls in the foreign market. It is this phase in which exports receive a much-needed boost.
When a currency depreciates, domestic producers generate more income and experience increased capital inflows, which encourages them to increase production and maximize their profits. The aggregate demand rises as well.
Hence, we can say that the impact of currency depreciation is in reverse as compared to currency appreciation.
Concluding Words:
All this while, if you have been wondering whether currency appreciation and depreciation impact international trade, particularly the way in which exports and imports function, then now you know the kind of impact the said currency fluctuations have.
That said, we at JIMS would like our readers to understand that it is not always possible to control currency fluctuations because a number of factors are responsible for the same. The only thing that an economy can do is properly assess the movement of currencies and eventually take a call on the preventive steps that need to be taken. Exports and imports are the whole and sole of every economy, which is why keeping an eye on currency fluctuations becomes all the more important.
Now, if you are someone having a strong interest in learning about financial management, it is important for you to be aware of concepts like these. As one of the top colleges for PGDM in Delhi, we at JIMS make sure that our pupils are well aware of the nitty-gritty of the financial world as we firmly believe that all this know-how would come to their aid in building a strong knowledge and skill base. After all, it is their knowledge framework that would eventually help them carve their own way into the professional world!
