So i came across these sentences when reading about the j curve:

In the goods market model, it is assumed that the exchange rate (E$/£) is directly related to current account demand in the United States. The logic of the relationship goes as follows. If the dollar depreciates, meaning E$/£ rises, then foreign goods will become more expensive to U.S. residents, causing a decrease in import demand.

I didn't understand this sentence : If the dollar depreciates, meaning E$/£ rises....

Doesn't E$/£ mean that the dollar is the base currency ? So for example , if i said that E$/£= 1.12£ then with one dollar you get 1.12 pounds? Doesn't this mean that if the dollar depreciates , then the exhcange rate should decrease?

So in case of depreciation of the dollar , the paragraph says that meaning E$/£ rises. But how is that possible ?

If the E$/£ is 1.12£ as of now , and say, it becomes E$/£=1.15£, before with one dollar before you could buy 1.12£, and now you can buy more , or else 1.15 pounds. This means that the dollar has appreciates in value.

What am i getting wrong?

  • 1
    Dollars per pound is measured in... dollars. ( $/£ means a variable amount of dollars, for 1 pound) So your E$/£ is given in dollars, so your argument is upside down. – Stian Yttervik Nov 25 '19 at 11:42
  • Im sorry i cant seem to wrap my head around it... on investopedia it states : A standard currency quote lists two currencies as a rate. For example, USD/JPY = 104.08. The first of the two currencies (USD) is the base currency and represents a single unit, or the number 1 in the case of a fraction such as 1/104.08. The second is the quoted currency and is represented by the rate as the amount of that currency needed to equal one unit of the base currency. The way this quote reads is: One U.S. dollar buys 104.08 units of Japanese yen. – GGGG Nov 25 '19 at 11:46
  • Yes, so that would be 104.08 yens per dollar. The dollars per yen would be in the 0.01 range. – Stian Yttervik Nov 25 '19 at 11:48
  • So in our case, it would read that one US dollar buys 1.12 pounds. How is my argument wrong? If the exchange rate was £/$, then one pound would buy a certain amount of dollars – GGGG Nov 25 '19 at 11:48
  • then it would mean that 1 dollar buys 104.08 yen . so this implies that my us dollar in my example would buy 1.12 pounds. so if the exhcange rate appreciates, my dollar would now buy 1.15 pounds. So the dollar appreciates. – GGGG Nov 25 '19 at 11:49

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