Exchange Rates - Five Key Definitions

Key terms

Appreciation

A rise in the external value of one currency against another or a basket of currencies. Relates to a floating exchange rate system.

Competitive devaluation

When a country tries to devalue its currency to increase its price competitiveness in domestic and overseas markets.

Currency union

A group of countries (or regions) using a common currency – for example 19 countries that have entered the single European currency (as of April 2019).

Internal devaluation

Where a country seeks to regain competitiveness through lowering wage costs and increasing productivity and not by reducing the external value of exchange rate.

PPP Exchange Rate

The rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each country. Used in assessing relative living standards.