Comparing Currency Depreciation
An economic analyst is comparing the currency performance of two countries over a single year. The exchange rate is defined as units of the home currency per unit of a common foreign currency.
- Country X: The exchange rate moved from 2.0 to 2.2.
- Country Y: The exchange rate moved from 10.0 to 10.2.
The analyst notes that the absolute increase in the exchange rate was 0.2 for both countries. However, they argue that Country X experienced a more significant currency depreciation. Explain the reasoning behind this argument. Your explanation should include a calculation of the percentage change for each country and a discussion of why this percentage measure is a more appropriate indicator for comparison than the absolute change.
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Condition for Nominal Depreciation (δ > 0)
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An exchange rate is quoted as the number of units of a home currency required to purchase one unit of a foreign currency. A depreciation of the home currency means its value has decreased, so the exchange rate number increases. Given the following changes in exchange rates over a one-year period, which scenario represents the largest percentage depreciation of the home currency?
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- Scenario 1: The exchange rate moves from 2.00 to 2.20.
- Scenario 2: The exchange rate moves from 5.00 to 5.20.
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A country's currency exchange rate is expressed as units of home currency per unit of foreign currency. In the first half of the year, the home currency depreciates by 10%. In the second half of the year, it depreciates by an additional 5% relative to its value at mid-year. What is the total rate of depreciation for the entire year?
Comparing Currency Depreciation
An exchange rate is quoted as the number of units of a home currency required to purchase one unit of a foreign currency. Match each exchange rate scenario with the correct rate of depreciation for the home currency over the period.