Geographically people are located at different locations of the world hence the existence of various distinguishing mediums such as currencies, dressings, cultures and even business activities. Over the years the increasing insatiable human needs accompanied by geographical limitations has brought about the need for some form of ‘inter-trade”amongst this various geographic locations. For effective trade to exist therefore, there was need for an exchange rate to ensure equality in the transactions.
What is Exchange rate?
‘ Exchange Rate ‘ is the price of a nation’s currency in terms of another currency. It is the equivalence or worth of a nations currency when compared to another country’s currency. This means that exchange rate has two components, the domestic currency and a foreign currency. It can be quoted either directly or indirectly.
Devaluation and Depreciation of Exchange rate
A devaluation is when a country deliberately decides to lower its exchange rate in a fixed or semi fixed exchange rate based on a particular policy while depreciation is said to occur when there is a fall in the value of a currency in a floating exchange rate.It is purely a function of supply and demand side factors and not a government oriented decision aside from if the government chose to sell plenty of their currency.
Its pertinent to note that devaluation of currency could overtime result in the depreciation of such a currency. Nigeria for example devalued her currency and has adversely resulted in the depreciation of the Naira.
Implications of Exchange rate
The existence of an exchange rate could be an advantage or a disadvantage to a country depending on the economic activities and policies existing in such a country. Its necessary to know that the exchange rate of a particular currency could either fall or appreciate depending on the demand for that particular currency. Back to the implications; Owing to the fact that most economies are opened economy that involves importation and exportation of goods and services either as raw materials or finished products, a fall (devaluation or depreciation) in a local currency should originally boost exports as well as the National income. This is because exports becomes relatively cheaper when compared to imports as such foreigners are motivated to purchase the goods from the exporting country.
Also a rise (appreciation) in the value of a local currency discourages exports and promotes imports. The reason behind this is not far fetched as the foreign goods becomes cheaper compared to local goods and services.
This same principle applies to investments in securities in either a case of depreciation or appreciation of currency.
WHAT TO NOTE: Devaluation and deprecation only becomes benefiting to a nation if such a nation engages in gross production and exporting activities. It then means that for a nation that does not engage in production activities and apparently exportation activities, a case of devaluation and depreciation becomes very detremental.
Conclusively,exchange rate exists between countries. And it appreciate and depreciate depending on the demand for currency.
Written by Julius O. Akubo,