Appreciation refers to an increase in the value of an asset over time, which can result from various factors such as inflation, a rise in market price, or interest earned. This term is essential for understanding the financial dynamics related to assets and currency values.
A critical adjustment in the value of a country's currency, devaluation can help rectify issues of overvaluation, uncompetitive exports, or an adverse balance of trade, amid the backdrop of a fixed exchange rate system.
A dirty float (also referred to as a 'managed float') is an exchange rate system in which a country's currency value is primarily determined by market forces, such as supply and demand, but with occasional intervention by the central bank. This intervention can take the form of buying or selling the country's own currency to stabilize or alter its value. The goal is often to prevent excessive short-term fluctuations and to maintain a more stable economic environment.
Purchasing power refers to the quantity and quality of goods and services that a given amount of currency can buy. Changes in purchasing power are influenced by inflation and deflation. This concept is crucial for both businesses and consumers as it impacts economic decisions and financial planning.
Purchasing power risk refers to the risk that inflation will erode the value of the currency in which an investment or deal has been made, effectively reducing the real return on investment over time.
A Real Exchange Rate (RER) is an exchange rate that has been adjusted for the effects of inflation, providing a more accurate reflection of a currency's purchasing power.
Real Purchasing Power reflects the value of a currency in terms of the quantity of goods and services it can buy, adjusted for inflation. It provides a more accurate measure of financial well-being by accounting for changes in price levels over time.
