What does appreciate mean economics

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Advertisement Advertisement. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. For example, in and , the UK had a sharp appreciation in the exchange rate, partly due to the discovery of North Sea oil. However, this appreciation was a factor in causing the recession of — which particularly affected UK exports and manufacturing.

It will be more expensive for the local investors to undertake production for exports since entrepreneurs are often profit maximizing. However, this happens when the PED for the exports is elastic.

In case of inelastic goods, exports revenue may actually rise and local investors will gain from the appreciation of the currency. The stronger GBP would also mean that the UK is able to benefit from being a strong currency haven that is able home in as a banking center.

How does an appreciating currency affect the equilibrium level of income and aggregate expenditure in a country? An appreciation means an increase in the value of a currency against other foreign currency. An appreciation makes exports more expensive and imports cheaper. Effects of an appreciation on the UK economy Exports more expensive. The foreign price of UK exports will increase — so Europeans will find British exports more expensive.

Therefore with a higher price, we would expect to see a fall in the quantity of UK exports. Imports are cheaper. Therefore, with cheaper imports, we would expect to see an increase in the number of imports. Lower X-M With lower export demand and greater spending on imports, we would expect fall in domestic aggregate demand AD , causing lower economic growth.

Lower inflation. An appreciation tends to cause lower inflation because: import prices are cheaper. The cost of imported goods and raw materials will fall after an appreciation, e. Lower AD leads to lower demand-pull inflation. With export prices more expensive, manufacturers have greater incentives to cut costs to try and remain competitive.

Monetary policy. It is possible that an appreciation in the exchange rate may make the Central Bank more willing to cut interest rates. An appreciation reduces inflationary pressure so interest rates can be lower. Also higher interest rates would cause the currency to rise even more.

If the Central Bank thought appreciation was too rapid, they may cut rates to reduce the value of the currency. Impact of an appreciation on the current account Assuming demand is relatively elastic, we would expect an appreciation to worsen the current account position. However, the impact on the current account is not certain: An appreciation will tend to reduce inflation.

This can make UK goods more competitive, leading to stronger exports in the long term, therefore, this could help improve the current account. The impact on the current account depends on the elasticity of demand. If demand for imports and exports is inelastic, then the current account could even improve. Exports are more expensive, but if demand is inelastic, there will only be a small fall in demand.

The value of exports will increase. If demand for exports is price elastic, there will be a proportionately greater fall in export demand, and there will be a fall in the value of exports. Often in the short term, demand is inelastic, but over time people become more price sensitive and demand more elastic. It also depends on what goods you export. Some goods with little competition will be inelastic.

Evaluating the effects of an appreciation Elasticity. The impact of an appreciation depends upon the price elasticity of demand for exports and imports. In the short run, we often find demand for exports and imports is inelastic, so an appreciation improves current account. But, over time, demand becomes more elastic as people switch to alternatives.

The impact of an appreciation depends on the situation of the economy. If the economy is in a recession, then an appreciation will cause a significant fall in aggregate demand, and will probably contribute to higher unemployment.

However, if the economy is in a boom, then an appreciation will help reduce inflationary pressures and limit the growth rate without too much adverse impact. It also depends on economic growth in other countries. If Europe was experiencing strong growth, they would be more likely to keep buying UK exports, even though they are more expensive. However, in , the EU economy was in a recession and therefore was sensitive to the increased price of UK exports.

It also depends on why the exchange rate is increasing in value. If there is an appreciation because the economy is becoming more competitive, then the appreciation will not be causing a loss of competitiveness. But, if there is an appreciation because of speculation or weakness in other countries, then the appreciation could cause a bigger loss of competitiveness.

Is an appreciation good or bad? An appreciation can help improve living standards — it enables consumers to buy cheaper imports. An appreciation could be a problem if the currency appreciates rapidly during difficult economic circumstances. Rapid appreciation in and contributed to recession of — 81 For example, in and , the UK had a sharp appreciation in the exchange rate, partly due to the discovery of North Sea oil.

Related Effects of a devaluation. How does appreciation affect investment opportunities in a country Reply. How will local investor gain?? We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent. Cookie Settings Close and accept all.

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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. Table of Contents Expand. What Is Appreciation? How Appreciation Works. Calculating the Appreciation Rate. Appreciation vs. Example of Capital Appreciation. Example of Currency Appreciation.

Appreciation FAQs. The Bottom Line. Key Takeaways Appreciation is an increase in the value of an asset over time. The appreciation rate is the rate at which an asset grows in value. Capital appreciation refers to an increase in the value of financial assets such as stocks. Currency appreciation refers to the increase in the value of one currency relative to another in the foreign exchange markets.

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