An exchange rate change means one currency now buys more or less of another. Work out the direction first, then trace what it does to the prices of imports and exports.
This lesson is part of globalisation and international trade. If the direction of a rate confuses you, read converting a quoted exchange rate in the correct direction first.
How do you tell whether a currency rose or fell?
Use two steps. First, write the rate as “RM1 buys ___ units of the foreign currency”. Second, compare the two numbers.
If RM1 buys more foreign currency than before, the ringgit has appreciated. If RM1 buys less, it has depreciated.
Worked example: the Suria
In the fictional example, the foreign currency is the Suria (SR). The rate moves from RM1 = SR4 to RM1 = SR5.
RM1 now buys 5 SR instead of 4, so the ringgit has appreciated.
An import. A machine costs SR200 from a seller abroad. At SR4 per RM1 the cost is 200 ÷ 4 = RM50.
At SR5 per RM1 it is 200 ÷ 5 = RM40. The import is cheaper in ringgit.
An export. A ringgit-priced bag sells abroad for RM100. At SR4 per RM1, the foreign buyer pays 100 × 4 = SR400.
At SR5 per RM1, the buyer pays 100 × 5 = SR500. The export is dearer for the foreign buyer.
The same rate change has opposite effects on the two flows. An appreciation makes imports cheaper and makes exports harder to sell abroad.
| Home currency | Import price in home currency | Export price in foreign currency |
|---|---|---|
| Appreciates | Falls | Rises |
| Depreciates | Rises | Falls |
Which mistakes cost marks?
The usual slip is to read the number alone and say “the rate rose from 4 to 5, so the Suria is stronger”. The number counts Suria per ringgit, so a higher number means the ringgit is stronger and the Suria weaker.
A second slip is to apply the change to the wrong flow. A fall in the home currency makes imports dearer, not exports. A third is to claim exports definitely rise, when the answer depends on how foreign buyers respond.
Check yourself
The rate moves from RM1 = SR5 to RM1 = SR4. State what happened to the ringgit, then the ringgit cost of a SR200 import.
Answer
RM1 now buys 4 SR instead of 5, so the ringgit has depreciated.
At SR5 per RM1, the import costs 200 ÷ 5 = RM40. At SR4, it costs 200 ÷ 4 = RM50. Imports became dearer in ringgit.
What to study next
Learn how trade and money flows are recorded in reading balance of payments information within scope. Then use the globalisation and trade practice set.
To have a teacher check your direction on new rates, see online one-to-one Economics tuition.