Definitions of floating exchange rate, appreciation and depreciation

International Trade & Globalisation – Foreign Exchange Rates

Floating Exchange Rate

A floating exchange rate is like a market‑price pizza that changes every minute based on how many people want it and how many are offering it. The value of a currency against another is determined by supply and demand in the foreign‑exchange market, so it can go up or down without a central bank fixing it. 🍕💱

Appreciation & Depreciation

When a currency appreciates, it becomes stronger relative to another. Imagine you can buy a pizza for fewer dollars – the dollar is now worth more. Mathematically, if the exchange rate changes from \$1.20\$ to \$1.10\$ USD/EUR, the dollar has appreciated against the euro. 📈

When a currency depreciates, it becomes weaker. Now you need more dollars to buy the same pizza. If the rate moves from \$1.20\$ to \$1.30\$ USD/EUR, the dollar has depreciated against the euro. 📉

• Appreciation: “The dollar is stronger, you get more euros per dollar.”
• Depreciation: “The dollar is weaker, you get fewer euros per dollar.”

Quick Reference Table

Remember: Appreciation = you get more of the other currency for one unit of yours. Depreciation = you get less. Think of it like swapping stickers – the more valuable your sticker, the fewer you need to trade for the same number of your friends’ stickers. 🏆➡️🏆