Currency changes, prices and the current account
| English | 中文 | Pinyin |
|---|---|---|
| revaluation/rɪˌvæljuːˈeɪʃn/ | 货币升值（官方调整） | huò bì shēng zhí （ guān fāng tiáo zhěng ） |
| devaluation/diːˌvæljuːˈeɪʃn/ | 货币贬值（官方调整） | huò bì biǎn zhí （ guān fāng tiáo zhěng ） |
A decision you can investigate
- A currency weakens. Exporters hope foreign customers buy more, while importers face higher local costs.
- A price advantage does not guarantee an improved trade balance.
Build the explanation
- Appreciation and depreciation are rises and falls in a currency’s market value. Revaluation 货币升值（官方调整） and devaluation 货币贬值（官方调整） are official upward/downward changes to a fixed or managed parity.
- A depreciation makes imports dearer in domestic currency and exports cheaper abroad when their original-currency prices stay unchanged. Appreciation reverses those effects. Demand responses depend on substitutes, necessities, contracts and time.
Work through the evidence
- Use fictional rates: the yuan depreciates from 7 to 8 yuan per dollar. A 100-dollar import rises from 700 to 800 yuan. An export priced at 560 yuan falls from 80 dollars to 70 dollars for the foreign buyer.
- Import quantity may fall and export quantity rise, but not instantly. If an essential imported input has very inelastic demand, its expenditure can rise. Export receipts depend on both foreign price and quantity; the current account also includes other flows.
What is the new yuan cost of the 100-dollar import?
100 × 8 = 800 yuan.
Test the limits
- Do not confuse a lower foreign-currency export price with a lower domestic-currency price. Pass-through may be incomplete if firms change mark-ups.
- Appreciation can cheapen imported inputs and reduce imported inflation, yet weaken price competitiveness of exports. Product quality and foreign incomes also matter. Judge the current-account effect using values and responsiveness, not the direction of the currency alone.
What is the new dollar price of the 560-yuan export?
Convert yuan to dollars by dividing by 8.
An appreciation can reduce the domestic cost of a foreign-priced imported input.
A stronger domestic currency buys the same foreign currency with fewer domestic units, other factors unchanged.
Apply and explain your answer
- What happens to the foreign price of the 560-yuan export in the fictional depreciation?
- It falls from 560/7 = 80 dollars to 560/8 = 70 dollars.
Why might a depreciation fail to improve the current account immediately?
Quantities and values depend on responsiveness and timing.
Use the terms precisely
- devaluation: An official downward change in a currency’s fixed or managed parity.
- revaluation: An official upward change in a currency’s fixed or managed parity.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Use fictional rates: the yuan depreciates from 7 to 8 yuan per dollar. A 100-dollar import rises from 700 to 800 yuan. An export priced at 560 yuan falls from 80 dollars to 70 dollars for the foreign buyer. Import quantity may fall and export quantity rise, but not instantly. If an essential imported input has very inelastic demand, its expenditure can rise. Export receipts depend on both foreign price and quantity; the current account also includes other flows.
Do not confuse a lower foreign-currency export price with a lower domestic-currency price. Pass-through may be incomplete if firms change mark-ups. Appreciation can cheapen imported inputs and reduce imported inflation, yet weaken price competitiveness of exports. Product quality and foreign incomes also matter. Judge the current-account effect using values and responsiveness, not the direction of the currency alone.
Appreciation and depreciation are rises and falls in a currency’s market value. Revaluation and devaluation are official upward/downward changes to a fixed or managed parity.