Appreciation Definition – An increase in the value of one country’s currency with respect to another. This means that one unit of the appreciating currency buys more units of the other currency than it did previously. Economic fundamentals of the two countries generally determine the relative value between each. Appreciation also makes exports from the country with the appreciating currency more expensive, while making imports less expensive. Exchange rates may be fixed or flexible. An exchange rate is fixed when two countries agree to maintain a fixed rate to settle daily trade differences between respective Central Banks. Historically, the most famous fixed exchange-rate system was the gold standard. In the late 1850s, one ounce of gold was defined as being worth 20 U.S dollars and 4 pounds of silver. An exchange rate is flexible, or “floating,” when two countries agree to let international market forces determine the rate through supply and demand. Most world trade currently takes place with flexible exchange rates that fluctuate within relatively fixed limits. China and India are notable exceptions.
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