Foreign Exchange Rate

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Meaning of foreign exchange rate

All the countries in the world has their own currencies which are surely acceptable within their respective boundaries.
For example; Indian rupee in india, Us dollar in America, pound in England etc. However currency of one country is not accepted in some other countries.
In simple words foreign exchange rate refers to the rate at which one currency is exchanged for the other.

Currency depreciation

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Currency depreciation refers to decrease in the value of domestic currency in terms of foreign currency.
Example
A change from $2=£1 to $1.5=£1 represents UK pound is depreciating.

Effect of depreciation of domestic currency

1. Increase in Exports
   Depreciation of domestic currency means a fall in the price of domestic currency in the terms of foreign currency. It means in same amount of dollars or any other currency more goods can br purchased from a certain country.

2. Decrease in Imports
   Depreciation will lead to decrease in imports as one has to pay more domestic currency to import foreign goods.

3. Increase in National Income
   As the exports will increase and imports will decrease the net exports will increase.

Currency appreciation

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Currency appreciation refers to increase in the value of domestic currency in terms of the foreign currency. Example A change from $1.5=£1 to $2=£1 represents that the UK pound is appreciating.

Effects of appreciation if domestic currency

1. Increase in imports
   Appreciation of domestic currency means a rise in the price of domestic currency in the terms of foreign currency. Now more goods can be purchased from a foreign country from same amount of money.

2. Decrease in Exports
   Appreciation will lead to decrease in Exports as one unit of foreign currency will now can buy less of domestic goods.

3. Decrease in National Income
   As exports fall and import increases it will rise due to appreciation of currency the net exports will decrease. It will reduce national income.