6.2 Exchange Rates

Exchange rates are the price at which one international currency can be exchanged for another. In other words, it's the price at which one currency can be bought with another.

Appreciation occurs when the value of a country's currency increases relative to a foreign currency. Depreciation occurs when the value of a country's currency falls.

Let's look at various currencies and their exchange rates to the U.S. Dollar and whether they have appreciated or depreciated:

If we look at the British Pound, we see that the exchange rate increases from .75 to .80 from March to July. This means that the British Pound has become more expensive or has appreciated in value.

If we look at the European Euro, we see that the exchange rate decreases from 1.10 to 1.05 from March to July. This means that the European Euro has become less expensive, or has depreciated in value.

We can also use the information above to calculate the price of a U.S. good in the various currencies. We do this by simply multiplying the price of the U.S. good by the exchange rate for whichever country we are looking at. So for example, a $300 hotel room in the U.S. would cost 💷225 pounds in Britain.