Suppose that, in Year 1, the price of the U. K. pound is $1.44 = £1. In year 2, the price is $1.48 = £1. An economist would validly conclude that, from Year 1 to Year 2 and in nominal terms, the U. K. pound relative to the U. S. dollar and, simultaneously, the U. S. dollar relative to the U. K. pound.

Appreciated; Depreciated

Explanation:

Given that,

In year 1,

Exchange rate between U.K and U.S is as follows:

$1.44 = 1 pound

In year 2,

Exchange rate between U.K and U.S is as follows:

$1.48 = 1 pound

Above exchange rates in the year 1 and 2 indicates that there is an appreciation in the currency of U.K relative to the U.S dollar and there is a depreciation in the currency of U.S relative to the U.K pound.

For example: A resident of U.S wants to purchase a pair of shoes from U.K worth of 10 pounds.

In year 1,

He have to pay in U.S dollars:

= 10 × $1.44

= $14.4

In year 2,

He have to pay in U.S dollars:

= 10 × $1.48

= $14.8

We can see that the amount paid by him from year 1 to year 2 increases, though the price of shoes remains the same. Hence, there is an appreciation in the currency of U.K and depreciation in the currency of U.S.

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