A currency appreciates when it buys more of another currency, and depreciates when it buys less. The skill is to say which currency moved, using the rate before and after.
This lesson follows calculating a conversion from a given rate and sits in international trade and exchange rates. The next lesson uses these labels to trace effects on traders.
How do I decide which currency moved?
Always ask: what does one unit of the currency I am naming buy now, compared with before? If it buys more, it has appreciated. If it buys less, it has depreciated.
The trap is that a rate is written as “1 dora = … kesa”.
The number tells you about the dora directly. For the kesa you must flip it.
Worked example
The rate was 1 dora = 5 kesa. It changes to 1 dora = 4 kesa.
Step 1, name the currency in the “1 unit” position. One dora used to buy 5 kesa and now buys 4. It buys fewer, so the dora has depreciated.
Step 2, flip for the other currency. Before: 1 kesa = 1/5 = 0.20 dora. After: 1 kesa = 1/4 = 0.25 dora. One kesa now buys more dora, so the kesa has appreciated.
Step 3, measure the size. The dora fell from 5 to 4 kesa, a drop of 1. As a percentage of the starting value: 1 ÷ 5 = 0.20, so 20% depreciation.
Step 4, check the effect on a price. A 2,400 dora machine cost 12,000 kesa at the old rate (2,400 × 5). At the new rate it costs 9,600 kesa (2,400 × 4). The Kesland buyer pays less, which fits the kesa having appreciated.
Notice that the kesa’s rise is 25% in dora terms (0.20 to 0.25), not 20%. The percentage depends on which currency you use as the base.
The mistake to watch for
A common slip is reading a falling number as a falling currency, whichever currency is meant.
Mistaken answer: “The rate went from 5 to 4, so the kesa depreciated.”
The student saw the number drop and attached it to the kesa. The 5 and 4 are kesa per dora, so they measure the dora.
The correction is to name the currency first, then ask what one unit of it buys. The dora buys fewer kesa, so the dora depreciated and the kesa appreciated.
Check yourself
1. The rate moves from 1 dora = 5 kesa to 1 dora = 6 kesa. Which currency appreciated?
Show answer
One dora now buys 6 kesa instead of 5, so the dora appreciated. Each kesa buys fewer dora (1/6 instead of 1/5), so the kesa depreciated.
2. The rate moves from 1 kesa = 0.20 dora to 1 kesa = 0.16 dora. What has happened to the kesa, and what is the new rate for 1 dora?
Show answer
One kesa buys 0.16 dora instead of 0.20, so the kesa depreciated. New rate for 1 dora: 1 ÷ 0.16 = 6.25 kesa. The dora appreciated.
3. Calculate the percentage appreciation of the dora when 1 dora = 5 kesa becomes 1 dora = 6 kesa.
Show answer
Change = 6 − 5 = 1 kesa. Percentage = 1 ÷ 5 × 100 = 20% appreciation.
Where this leads next
With the labels secure, continue to tracing the effects on an importer and an exporter. The ratios tool is useful for checking the before and after rates side by side.
If you understand each step but still hesitate over which currency to name, our teachers can drill it with fresh examples in online one-to-one Economics tuition.