EXCHANGE RATE, Devaluation vs Depreciation, Revaluation vs Appreciation

 

EXCHANGE RATE: 

• An Exchange rate / Foreign-exchange rate / Forex rate between two currencies is the rate at which one currency will be exchanged for another foreign currency. 
• It is also regarded as the value of one country’s currency in terms of another currency.
• Movement in Exchange rates affect the trade between two countries.

It can be written as:

                                                    1 USD =86 INR 

                                                              OR

                                                    1 INR =1/86 USD

Movements of currency’s Exchange Rates:

Currency’s exchange rates are regulated either by:

                                                         Market 

                                                            or 

                                              The Government /Central Bank 

Depending upon the mode of regulation, it can be either Devaluation, Revaluation, Depreciation and Appreciation.

DEVALUATION: 

• is downward adjustment of the currency with relation to other foreign currency
• is regulated by deliberate action of the government.
• takes place in a pegged / Fixed exchange rate system
• is just opposite of Revaluation.

So, If the value 1 USD =86 INR goes to:

1 USD =90 INR by the order of Government, then the value of INR devalue wrt Dollar.

Depreciation:

• is the fall in the value of currency.
• takes place in a floating Exchange rate regime.
• is controlled by market factors like economic fundamentals, political stability and other related factors.
• is just opposite of Appreciation. 

So, If the value 1 USD =86 INR goes to:

1 USD =90 INR under the influence of market forces, then the value of INR depreciates  wrt Dollar.         

Devaluation vs Depreciation:

• The devaluation and depreciation similar in the sense of their after-effects as the value of currency is decreasing /falling.
• They only differ in the sense of how value of currency is falling if it is through market then it is depreciation and if it is by government order then devaluation.   
• Devaluation takes place in pegged / Fixed exchange rate system while depreciation takes place in floating Exchange rate regime.              

REVALUATION:

• is Upward adjustment of the currency with relation to other foreign currency
• is regulated by deliberate action of the government.
• takes place in a pegged / Fixed exchange rate system
• is just opposite of Devaluation.

So, If the value 1 USD =86 INR goes to:

1 USD =80 INR by the order of Government, then the value of INR Revalue wrt Dollar.

 Appreciation:  

• is the increase in the value of currency
• takes place in a floating Exchange rate regime.
• is controlled by market factors like economic fundamentals, political stability and other related factors.
• is just opposite of depreciation.

 So, If the value 1 USD =86 INR goes to:

1 USD =80 INR under the influence of market forces, then the value of INR appreciates  wrt Dollar. 

Revaluation vs Appreciation:

• The revaluation and appreciation similar in the sense of their after-effects as the value of currency is increasing.
• They only differ in the sense of how value of currency is increasing if it is through market then it is appreciation and if it is by government order then revaluation.   
• Revaluation takes place in pegged / Fixed exchange rate system while appreciation takes place in floating Exchange rate regime.