Depreciation Definition. Depreciation is a fall in the value of a currency due to market forces. This means that one unit of the depreciating currency buys less units of the other currency than it did previously. Economic fundamentals of the two countries generally determine the relative value between each. Depreciation also makes exports from the country with the depreciating currency less expensive, while making imports more 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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