Devaluation, Depreciation and Appreciation

Depreciation and appreciation of currency

Depreciation of a currency

This is when there is a decrease in the value of the domestic currency in relation to a foreign currency, purely caused by the market forces of demand and supply of the currency.

For example, when it was 1 Ksh = 10 TZS, and then it was 1 Ksh = 20 TZS, the Tanzania shilling has depreciated.

Effects of depreciation of a currency

1. Exports increase and become cheaper. Imports decrease as they become more expensive.
2. The deficit in the balance of payments reduces. This happens as exports increase and imports decrease.
3. Production is stimulated, promoting domestic industries. More employment opportunities are created.

Appreciation of the currency

This is when there is an increase in the value of the domestic currency in relation to a foreign currency, purely caused by the market forces of demand and supply of the currency.

For example, when 1 Ksh was 10 TZS and later it was 1 Ksh = 6 TZS, the Tanzania shilling has appreciated.

Effects of appreciation of a currency

1. Exports reduce as they become more expensive.
2. Imports increase as they become cheaper.
3. The deficit in the balance of payments increases. This results in a balance of payments problem.
4. Production contracts and results in increased unemployment.