Definition of appreciation – When you hear the term appreciation, perhaps the first thing that comes to mind is about giving an assessment or giving a reward to others. Yes, that’s true, because appreciation in general is an act of giving value from someone to works of art or to the actions of other people.
Even so, appreciation is not only in that scope, but appreciation also exists in the economic world. However, appreciation in economics has a slightly different meaning.
In simple terms, the notion of economic appreciation is about a condition that explains if one currency has increased. That means, one currency is experiencing a higher exchange rate compared to other currency values.
There are still many interesting things that we can learn together about appreciation in the economic world. So, for more details, you can try to read the full explanation about appreciation in the economic world here.
Definition of Appreciation in General
So that we can know the difference between the meaning of appreciation in general and the meaning of appreciation from an economic point of view, we will dissect each one so that it can be more clearly related to the meaning of appreciation in general and from an economic point of view.
Talking about appreciation, of course, we are familiar because this term is often used in everyday life. Appreciation itself is simply an appreciation of something.
Usually the term appreciation will be used to show an attitude of respect for what has been done or given by others. In addition, appreciation is also often used as giving value or evaluating something such as a work of art.
An example of an act of appreciation for others is when you meet other people one time. At that time you came earlier than your friends and this is included in the example of an act of appreciation.
From this example it can be concluded that appreciation has a function as an assessment, a form of concern and a function of developing something. Not only that, appreciation also has its own level. Where every level that is appreciated always has a different meaning.
The word appreciation itself comes from English, namely appreciation which means positive appreciation. Meanwhile, in the popular scientific dictionary, the word appreciation or appreciate is an assessment and appreciation of the work.
In the Big Indonesian Dictionary or KBBI, appreciation has two meanings. The first meaning of appreciation is as a form of awareness of artistic and cultural values. While the second meaning of appreciation is as a form of appreciation for something.
Understanding Appreciation in the World Economy
After knowing the meaning of appreciation in general. Next we will learn about the meaning of economic appreciation. The definition of economic appreciation with the understanding of appreciation in general is indeed different.
In the world of economics, appreciation is defined as a condition where the exchange rate of a currency against other currencies increases. Simply put, economic appreciation is a condition when one unit of currency is able to make the process of buying more of another currency. Economic appreciation is also often referred to as currency appreciation or currency appreciation .
Where later the economic appreciation will make foreign products have cheaper prices for buyers who are in the country. This will also result in a larger import shipping process.
However, the opposite condition will also occur. This is because the condition of economic appreciation when it occurs will result in domestic products having a higher selling value for foreign buyers so that in the end it will weaken the export process.
In addition to economic appreciation there is also depreciation. Where depreciation itself is the opposite of economic appreciation. A depreciating condition is when one currency matures with a weakened exchange rate against another currency.
When an economic depreciation occurs, you must be able to spend more money when you want to exchange it with foreign currency. In international trade, economic depreciation will make imported products more other. Even so, the price of domestic products is also cheaper.
Until now, there are many factors that can affect the condition of economic appreciation. Starting from the trade balance, interest rates, business cycles, economic policies to speculative activity.
Causes of Economic Appreciation
You could say the condition of the currency exchange rate is currently floating big. Where exchange rates fluctuate depending on supply and demand conditions that exist in the foreign exchange market. If conditions for currency demand increase, then these conditions can more easily increase purchasing power or value.
There are several factors that can cause conditions of economic appreciation or currency appreciation to occur. As previously explained, some of these factors are the trade balance, interest rates, capital flows, inflation, monetary and fiscal policies, speculation, and political stability.
Now to better understand what are the factors that influence economic appreciation apart from these factors, here is a full explanation.
1. Trade Surplus
One of the factors that can influence the occurrence of economic appreciation is the trade surplus. This is because international trade will involve currency as the payment process.
In addition, export activities also contributed to increasing the domestic currency. Meanwhile, import activities can cause currency demand conditions from partner countries.
An example is export-import activities between Indonesia and the United States. For example, you are an Indonesian and when you carry out the export process to the United States it will be able to help increase the demand for rupiah.
Where Americans must be able to process the exchange of dollars they have into Rupiah for payment to take place. In this case, an increase in exports can lead to an increase in demand for Rupiah.
This condition will also make the Rupiah have more value compared to the US dollar around or it can be called the value of the Rupiah depreciating. However, this will continue while import conditions and other factors remain constant.
Whereas the opposite condition will occur when the import process is carried out which will cause the demand for Rupiah to remain unchanged. Then, conditions on the demand for US dollars will increase.
This is because importers from Indonesia must exchange Rupiah as a method of payment for these products. Therefore, when import conditions are higher, it can result in a depreciation of the domestic currency.
So it can be concluded from this example that when Indonesia experiences a trade surplus against the United States, the demand for rupiah will also be higher than the demand for dollars. This will make the purchasing power of the Rupiah against the US dollar stronger or an appreciation of the currency occur.
Whereas the opposite condition will occur when Indonesia reports a trade deficit to the United States which will cause the Rupiah to depreciate due to lower demand for Rupiah compared to demand for US dollars.
2. There is an increase in interest rates
Interest rates will have an effect on exchange rates through their impact on capital flows. In this case, you really have to focus more on the spread between domestic interest rates and international interest rates.
Try to assume international interest rates in constant conditions. For example, when a domestic central bank adopts an expansionary monetary policy by changing interest rates for the better.
However, the opposite condition can occur when there is a decrease in interest rates which causes the spread of domestic interest rates to international interest rates to be lower and this turns out to be unattractive to foreign creditors.
Where they will move their capital to countries with higher return conditions. Outflows can cause depreciation of the domestic currency.
Interest rate spreads are one of the reasons why some foreign investors decide to move their money to more developed markets and when interest rates are close to zero in the United States, developing countries will be able to offer higher interest rates.
3. Differences in Inflation Rates
Changes in currency exchange rates can also be caused by inflation in a country. Where when a country has a higher inflation rate it can cause depreciation in the domestic currency compared to partner currencies. This will usually be followed by a higher interest rate.
4. Current Account Deficit
The current account is the trade balance between countries and their trading partners that make all payments between countries for types of goods, services, interest and dividends.
The current account deficit will be able to show the condition of a country that spends more funds on foreign trade transactions than its income. This is because the country has to borrow capital from foreign sources to be able to cover the deficit.
In other words, a country will need more of the foreign currency it receives from selling exports and supply more domestic currency than it demands foreign currency for each product.
Where conditions of excess demand for foreign currency will be able to reduce the exchange rate of the domestic currency. If this decline continues until domestic goods and services are considered to be cheap enough for foreigners and foreign assets will become more expensive when sold for domestic interests.
The Impact of Economic Appreciation
Economic appreciation or currency appreciation will make imported products cheaper for domestic buyers. Both for household needs and business needs. These conditions will be able to provide encouragement to domestic buyers to make purchase transactions which in turn can increase import activities.
When the domestic economy gets lower prices, these conditions will then be able to reduce pressure on imported inflation. Especially for businesses, they will get lower raw materials and capital goods. In addition, operational costs will also be lower, which will increase profitability. Therefore it will have a small possibility of an increase in selling prices.
On the other hand, economic appreciation will make domestic products more expensive for foreign buyers. This will make domestic products less competitive and even paralyze exports and reduce sales demand.
This also shows that if import activities increase, then simultaneously the trade balance will tend to decrease or even become a deficit.
The size of the impact of economic appreciation on the trade balance also depends on the elasticity of product demand. Where when demand is elastic, the impact of economic appreciation will be more significant because buyers will usually be more sensitive to price changes and vice versa when demand is inelastic, the impact of economic appreciation will be smaller.
Economic appreciation does not only affect the trade balance. However, economic appreciation also has other impacts. Now for more details, here is the impact of economic appreciation.
1. There is Increased Competition in Imported Products
When the price condition is lower, there will be an increase in demand for imports and it turns out that in the domestic market there will be even higher competition. In addition, some consumers will also switch to local products. In order to remain competitive, domestic companies will usually cut costs, increase productivity and also lower selling prices.
2. There is a decline in economic growth
The decline in economic growth also includes the impact of economic appreciation. For example, we have the assumption that other components of GDP such as consumption, investment and government spending do not change. In this case, economic appreciation will not only be able to increase imports, but will also weaken exports. As a result, the gross domestic product or GDP has decreased.
3. Decrease in Foreign Loans
Let’s take the example of an Indonesian company issuing global bonds denominated in US dollars. For example, coupon payments in US dollars. When there is an appreciation of the rupiah against the US dollar, it will make the company need less rupiah to make coupon payments.
4. There is an Exchange Rate Translation Gain
For example, when US investors realize and convert their home capital gains into the functional currency of the US dollar. In that case, appreciation would result in foreigners earning more US dollars.
Difference between Appreciation and Depreciation
After knowing all things related to economic appreciation. Finally, we will learn about the difference between economic appreciation and depreciation.
The main difference between the two is the understanding. Where appreciation is simply an increase in value, while depreciation is a decrease in currency value. Most people hope that their investments can increase in value, be it stocks, bonds or precious metals.
Intangible or non-physical assets, non-monetary assets such as trademarks will also be able to increase in value. This can happen because there may be an increase in brand recognition.
Even so, most tangible assets such as physical assets and others will actually experience depreciation. This is because physical assets are often used until they lose their value. Where a physical asset will have a limited lifetime value before it is actually replaced.
For example, a new car will depreciate or lose value quickly when you drive it often. Where the car is used and has accumulated mileage and damage caused by driving activities.
Another example is that real estate is an asset that can experience appreciation and depreciation. Usually, the appreciation value of real estate will increase over time, although it depends on certain factors such as location and conditions.
Even so, the physical structure of the house will also experience a depreciation condition. An example is the toilet, sink and also the roof which I can damage after using it for quite a long time.
However, it should also be noted that when the value of a house increases because you made repairs to the depreciated part, it is not included in the appreciation class.
So, that’s a review of the meaning of economic appreciation that you can read in full. With the explanation above, of course, it will be easier for you to know how the appreciation condition is in the current era.
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