The lesson
Explain the mechanism, then qualify the outcome. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
Appreciation and depreciation
An exchange rate is the price of one currency in terms of another.
- A depreciation makes exports cheaper to foreign buyers and imports more expensive in domestic currency.
- An appreciation makes imports cheaper but can reduce export price competitiveness.
- The effect on trade values depends on demand elasticities and firms’ ability to increase supply.
The time path matters
Quantity responses can take time because of contracts, habits and limited production capacity.
- After depreciation, the import bill may initially rise before quantities adjust: the J-curve effect.
- More expensive imported fuel, food and inputs can create cost-push inflation.
- Evaluate the exchange-rate regime, confidence, foreign debt and whether export demand is sufficiently elastic.
Worked exam thinking
Worked example: depreciation and the current account
Prompt: Why might a depreciation initially worsen a country’s trade balance?
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1Define the core idea precisely.
- 2Explain the chain of cause and effect.
- 3Apply it to the context in the question.
- 4Evaluate a limitation, trade-off or condition.
Quick questions
Check your understanding
What is a depreciation?
A fall in the value of a currency against other currencies.
Does depreciation always improve exports?
It improves price competitiveness, but export demand, capacity, foreign-currency pricing and time lags determine the final effect.
What is the J-curve?
The possible pattern in which the trade or current-account balance first worsens after a depreciation and improves later as quantities adjust.