Question

Assume the spot rate of the British pound is $1.79. The expected spot rate 1 year from now is assumed to be $1.61. What percentage depreciation does this reflect? Do not round intermediate calculations. Round your answer to two decimal places. Enter your answer as a positive value.

Answer 1

The percentage depreciation of the British pound against the US dollar is approximately 10.06%, calculated using the given spot rates. A depreciation reflects a decrease in the value of one currency relative to another, influencing international trade by affecting the cost of exports.

Step-by-step explanation:

To calculate the percentage depreciation of the British pound against the US dollar, we need to evaluate the change in value between the current spot rate and the expected spot rate. The current spot rate is $1.79 and it is expected to change to $1.61. The formula for percentage change (depreciation in this case) is:

(New Value - Original Value) / Original Value × 100%

Applying the above formula:

(1.61 - 1.79) / 1.79 × 100% = -0.18 / 1.79 × 100%

Which gives us a percentage depreciation of approximately -10.06% (remember to keep it positive for this question, so we drop the negative sign).

The example provided in the question helps to illustrate how currency fluctuations can affect international trade. When the value of the US dollar decreases relative to the British pound, products priced in dollars become cheaper for buyers using pounds. For instance, if the British pound appreciates to $2.00 per pound, it means that a product like a Ford pickup priced at $25,000 would now cost £12,500 for buyers paying with pounds, making it less expensive for them compared to when the pound was weaker.