How to Calculate Currency Depreciation
Currency depreciation has two meanings. The first one is inflation (the loss of value of a currency over a period of time). The second one is the loss of value of one currency against another. This article explains how to calculate both types of currency depreciation.
Find out the former exchange rate of one currency against another. You need to know the exchange rate that prevailed before the depreciation. To get an exchange rate for a particular day, a closing exchange rate at 23:59 Greenwich Mean Time of that day is usually used.
Identify the exchange rate after the depreciation. Make sure the exchange rate definition is the same as you used in getting the exchange rate before the depreciation. For example, if you looked at EUR/USD (how much in U.S. dollars a euro is worth) before the depreciation, you need to know the EUR/USD exchange rate, and not USD/EUR.
To get a reverse exchange rate (say, to convert USD/EUR to EUR/USD), divide 1 by the exchange rate in question.
Take the exchange rate before and after the depreciation, subtract the smaller number from the greater, divide the result by the greater number, and multiply by 100. For example if the EUR/USD before depreciation was 1.3 and after the depreciation became 1.2, do the following to calculate the euro depreciation:
1.3 is greater than 1.2, so we subtract 1.2 from 1.3 and get 1.3-1.2=0.1
Then we divide 0.1 by the greater exchange rate number, which is 1.3, and multiply the result by 100: 0.1/1.3 x 100 = 7.7%.
This means that over the given period, the euro depreciated against the U.S. dollar by 7.7 percent.
Find out how much a currency could buy at the point of time from which you want to calculate the change in the currency's value. You can take an index of products, also known as a basket of products, and evaluate how much it costs.
Find out how much the same products cost at a later point in time. The period from the original point in time to this point in time is the period over which you will calculate currency depreciation.
Compare the two periods. A good way to do so is to measure by what percentage the currency has depreciated. To do that, divide the difference between the costs of the baskets of products at different times by the initial cost of this basket. Multiply the result by 100 to get the percentage of depreciation.
Point A--$100 Point B--$120
Currency depreciation=(Point B-Point A)/Point A=(120-100)/100=20 percent.