Appreciation is a term that refers to the increase in the value of a particular object or company. This increase in value will depend on each market or even a specific country. The appreciation of a good is determined by several external variables.
These variables can not only affect the increase (appreciation) of the value of a good but can also adversely affect what is called depreciation. In economic terms, it is a concept widely used in administrative, business management, business, and finance.
The appreciation has been the temporary or definitive increase in the value of a good. Generally, this increase occurs when there are adverse situations within the markets, it can also be motivated by the mechanisms responsible for regulating prices, known as supply and demand.
An example of this would be the increase in the price of a work of art. Here, if the good is in great demand because the research was done on the artist, it is very likely that attention will be moved to him, which causes it to have an impact on his works, increasing the value of the work of art. This is appreciation.
At the financial level, appreciation may also be an increase in the value of a currency as a result of the comparison with others. This applies when the floating currency conversion regime is not well regulated and in turn, the form revaluation system does not apply.
Characteristics of the Appreciation
These are the characteristics of appreciation:
- An increase in the demand for the national currency is equal to the appreciation of the national currency.
- When there is an appreciation of the currency, it affects national products by increasing their value for foreigners and lowers foreign products for residents of the country.
- Effects of appreciation:
- Create improvements in the relationships you have during the exchanges.
- Competitiveness in some national products deteriorates.
- There is a reduction in inflation-related rates.
- The trade balance, as well as that of goods and services, deteriorates.
- Decrease economic activity.
Causes of Appreciation
The exchange rate is the price of one currency over another, this is the result of what we know as an offer and a demand. An example may be the supply and demand for currencies. Here there is an appreciation for the national currency, only when there are excesses in the demand for the national currency.
Example: An appreciation will be an increase or a reduction in the exchange rate, this will depend on how the exchange rate is defined:
- If the exchange rate is defined as foreign currency units, which must be paid in exact amounts in exchange for national financial units, the appreciation of the national currency will mean an increase in the exchange rate.
- If the exchange rate (E) is defined as the number of units of national currency when paid for single units of foreign currencies, the national appreciation implies a decrease in the exchange rate.
It is convenient to talk about appreciation of the currency and not about increase or reductions in the exchange rate since depending on the way the change is defined, there will be increases in it, which will mean an appreciation or depreciation of the currency in question.
When there is an increase in the demand of the national currency, the balance will be restored by increasing the price of the national currency in terms of foreign currency, which is the same, through an appreciation of the national currency.
The revaluation is the system of fixed exchange rates and the increase in the value of the national currency. This occurs as a result of a political decision of the government and not of market forces.
It is important to be clear about the difference between appreciation and revaluation. One increases its value when it is made by supply and demand, while the other is caused by a political decision. It is not the same to say “the currency has appreciated” than to say, “the currency has been revalued.”
The appreciation and price of exported and imported products
The financial appreciation of a country has the consequence of making domestic products more expensive when they are taken abroad, it also makes foreign products cheaper for residents of the country.
To explain it better, we will show you two examples:
Example 1: How many dollars will a SEAT car cost that costs 12,000 euros?
- If the dollar/euro exchange rate is 1 Euro = $ 1.4, the car (national manufacturing) would be priced at $ 16,800
- If the euro appreciates against the dollar and the new dollar/euro exchange rate is 1 Euro = $ 1.7, the car would be priced at $ 20,400.
Example 2: How many euros would a Chrysler car cost $ 20,000 cost?
- If the dollar/euro exchange rate is 1 Euro = 1.4 $, the car of (national manufacture) would have a price of 14,286 euros
- If the euro is appreciated against the dollar and the new dollar/euro exchange rate is 1 Euro = $ 1.7, the car would be priced at 11,765 euros
Then, if everything else remains constant, an appreciation of the national currency, at the moment when our exports become more expensive and cheaper our imports, will cause a reduction in exports and an increase in imports.
Importance of the Appreciation
It is important to know this concept, since, in modern terms, it is a concept that is handled very frequently. It is important to know when an appreciation of the national currency will occur, which occurs when there is an increase in the demand for the national currency.
Also, it is important to know that the appreciation of a currency makes domestic products more expensive for foreigners since it lowers foreign products for residents in the country.