Question

A British pound cost \(\$ 2.00\) in U.S. dollars in 2008 , but \(\$ 1.27\) in U.S. dollars in \(2017 .\) Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?

Short answer

The British pound was weaker against the U.S. dollar in 2017 as compared to 2008, since its value decreased from \(\$2.00\) to \(\$1.27\). Consequently, the U.S. dollar appreciated versus the British pound.

Step-by-step solution

Compare the exchange rates in U.S. dollars

We know that in 2008, 1 British pound cost \(\$2.00\) in U.S. dollars, and in 2017 it cost \(\$1.27\) in U.S. dollars. Let's make the comparison: \(2008: 1 \; British \; pound = \$2.00\text{ in U.S. dollars}\) \(2017: 1 \; British \; pound = \$1.27\text{ in U.S. dollars}\)

Identify if the pound is weaker or stronger

As we can see, the cost of 1 British pound in U.S. dollars decreased from \(\$2.00\) in 2008 to \(\$1.27\) in 2017. This means that the British pound was weaker against the U.S. dollar in 2017 as compared to 2008.

Identify if the dollar appreciated or depreciated

Since the value of the British pound decreased in U.S. dollars, it means that the U.S. dollar has appreciated against the British pound. This is because you needed fewer dollars to buy the same amount of pounds in 2017 than you did in 2008. Therefore, we can conclude that the British pound was weaker against the U.S. dollar in 2017 as compared to 2008, and the U.S. dollar appreciated versus the British pound.

Key concepts

Currency Appreciation

Currency appreciation refers to the increase in value of one currency relative to another. When discussing foreign exchange rates, appreciated currencies can buy more units of a foreign currency than before. This change in value can occur due to various economic factors, such as interest rate changes, inflation, and economic growth. For example, if the U.S. dollar can buy more British pounds today than it could in the past, we say that the dollar has appreciated against the pound.

From our exercise, we gathered that in 2017, you would need fewer U.S. dollars to buy one British pound than you did in 2008. This indicates that over this period, the U.S. dollar has appreciated in value relative to the British pound. In practical terms, an American traveler could expect to spend fewer dollars for the same amount of goods and services in the UK in 2017 compared to 2008.

Currency Depreciation

Currency depreciation is the opposite of appreciation; it is when a currency loses value against another currency. When a currency depreciates, it means that it can buy fewer units of a foreign currency compared to a previous time. Depreciation can result from many of the same factors that affect appreciation, just in reverse—such as decreases in interest rates, rising inflation, or an economic downturn.

Taking the 2008 and 2017 exchange rates of the British pound and U.S. dollar from our exercise, we observe that the British pound has depreciated over this time period. This means that in 2017, it holds less value compared to the U.S. dollar than it did in 2008. This would affect British travelers going to the U.S., who would find that their money doesn't go as far as it used to.

Exchange Rate Comparison

Exchange rate comparison involves analyzing the value of one currency against another at different points in time. Traders, businesses, travelers, and economists are often interested in the historical performance of currencies to understand economic trends or to predict future movements. In our exercise, the comparison was made between the U.S. dollar and the British pound in 2008 and in 2017.

To compare exchange rates effectively and understand the exercise, it is crucial to look at how many units of one currency can be exchanged for one unit of another currency at different times. The decrease from \(2.00 to \)1.27 for one British pound clearly illustrates the concept of currency depreciation for the pound and appreciation for the dollar. Exchange rate comparisons are vital for financial decisions, such as investing in foreign markets or deciding when to exchange money for travel.