A depreciation changes prices across borders, and the whole economy feels it.
A depreciation, step by step
Exports cheaper abroad
A $10 shirt priced at 200 pesos falls to $8 when the peso drops: more sold.
Imports cost more at home
Foreign goods need more pesos, so residents buy fewer.
AD rises
Net exports rise: growth and jobs.
Prices rise
More demand, and imported inputs cost more: inflation.
Animated graph
Watch the graph build step by step in study mode.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
An appreciation works the other way. After the 2016 referendum the UK pound fell by about 10%, and inflation rose the next year.
Depreciation
- Growth and jobs: net exports rise.
- Inflation: imports and inputs cost more.
- Current account improves, after a lag.
- Living standards: imported goods cost more.
Appreciation
- Exporters lose sales: growth and jobs may fall.
- Lower inflation: imports are cheaper.
- Current account worsens.
- Living standards: imported goods and travel are cheaper.
The points to remember
- Write it like this: "A depreciation makes exports cheaper and imports more expensive, so (X − M) and AD rise."
- Always name the indicator: inflation, growth, jobs, the current account, living standards.
Memorize terms 3x faster
Smart flashcards show you cards right before you forget them. Perfect for definitions and key concepts.
Quick reminder
- AD/AS diagram: Price level up the side, Real GDP along the bottom; AD1, AD2 and SRAS; PL1, PL2, Y1 and Y2
- Market diagram: P and Q; D, S1 and S2; P1, P2, Q1 and Q2
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
Animated graph
Watch the graph build step by step in study mode.
A depreciation also raises the cost of imported inputs, so one market's supply falls.
Animated graph
Watch the graph build step by step in study mode.
Paper 1 asked this in May 2025, as part (b) for 15 marks.
Using real-world examples, discuss the consequences for an economy of a depreciation of its exchange rate.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |