right now I think understood how an exchange rate is 10 the next question is understanding how an exchange rate can appreciate and how an exchanger can depreciate in my previous video we looked at the price of pound the pound exchange rate dollars I'm going to stick with an example here so remember an exchange rate in this case the Pam exchange rate is determined by the force of demand supply there is a market for a currency and very simply when demand and supply in the market change that you can have a difference in price the price could increase exchange rate can depreciate or the exchange rate can depreciate so I'm going to stick with the price of pounds of dollars use that as the example and we'll stick with quantity of pounds down below but looking at the pound exchange rate here so let's say initially a equilibrium p1 q1 one pound could buy one dollar 60 let's say that was the initial equilibrium price but for some reason let's say demand for the pound is increased look at the diagram when demand increased when it shift to the right there is a new price a higher price form which means the exchange rate has got stronger the pound has got stronger what does that mean it means the power combine moral of the dollar more of another currency so maybe another pound can buy one dollar eighty instead I mean the pounds means the pound is not stronger so the next question is why might demand for the pound increase on a general level it means that foreigners are demanding the pound foreigners are demanding this currency and there are five main reasons why they might do that one maybe there has been an increase in relative interest rates that word relative is important because it means relative to the rest of the world so in the UK in this example interest rates are higher than the I anywhere else in the world if that's the case and if the increase is higher than anywhere else then foreigners are going to think we'll hang on a minute maybe now the UK is the best place to put my money the UK will give me a great way to return online savings so if I put my money in UK banks and UK and institutions I'm going to I'm going to get a very good way to protect so they do that and in doing so they did man the Pam they swapped their foreign currency for panels and that increases demand for the pound shifting it right increasing the pound appreciated maybe speculators who are just traders traders who trade in the foreign exchange market that they anticipate a rise in the pound thinkin if you will quickly move my money into pounds quickly let it rise and value and then take it away so I can make a profit so if they are dissipating rising the pound they're going to move that money into pounds increasing the demand for the pound causing it to appreciate in value if there is an increase in foreign direct investment basically foreign firms enter the UK and set up in the UK they have to pay for factories and pounds that depend on workers in pounds that to pay for machinery in perhaps everything needs to be done in pound so that involves exchanging their currency that they own for pound which increases the demand for the pound cause it to increase in price appreciated the legs to are altered with the price of the price of you can exports and the demand for UK exporters so number four there is a rise in incomes abroad it means now that foreigners might actually demand UK exports they've got richer means the my war more stuff some of that stuff might be produced in the UK in which case they have to buy in pounds they can't pay for UK goods in their own currency they have to pay in pounds that that involves some swapping their currency propellants increase in demand and if UK goods UK exports become very competitive so there is an increase in international competitiveness very because of a fallen unit labor costs for inflation and rising investment will be a rising productivity all of which maybe you can explore some more competitive maybe that will increase the demand for UK exports and therefore has more exports of sold people have to buying pounds that increases the demand for the pound all right so this market we're looking at the demand supply of the pound so here demand for the pound is for these five reasons causing the currency to appreciate but similarly the pound can depreciate or any currency can depreciate is supply shifts to the right so if a currency depreciates may be initially in this case one pound could buy one dollar sixty but now because depreciated one time going to only buy 140 million so when it currency depreciates it can buy less of another currency so why might supply shift to the right well when would people want to exchange their pounds for another currency because that's what it means it's applying pieces people want to swap their pounds for a different currency exchange their parent well if there is been a fall in interest rates are falling relative interest rate now all of a sudden investors that currently have their money in UK banks are thinking well hmm UK is not so good anymore it's not a not a great place for you to get a rate of return on my seen so they move their money away from the UK increasing supply the pound for another currency that's just the opposite of this that's just the opposite of memories in FDI so if firms they were originally operating in Britain decide to move away then all the pads on their hold are going to be swapped for another currency and in doing so that increases the supply of the panel similarly number four there are income increasing incomes abroad sorry increasing incomes at home domestically it basically people in the UK get richer they're going to demand more imports and when we demanded buy more imports we have to buy another currency so if you want to buy goods from USA we have to buying dollars which involves exchanging the pound selling the pound for dollars and then increase the supply so all of these four factors here will increase supply where the pound is exchanged for another currency whereas these five red factors or where foreigners actually want the pound they exchange their currency for the pound they're desperate they demand the pound and that increases to them and I caused the to appreciate whereas when supply increases it causes the currency to depreciate I thought that that now makes sense you can understand why currencies change this is very important to know so learn these very well and hopefully now you're a master of exchange rate changes see you next time thank you very much