10.2.1—Internal and external money value

The internal value of money is its purchasing power over domestic goods and services, which falls as the price level rises. The external value is the currency’s exchange rate against other currencies.

A currency can depreciate externally and still have stable internal purchasing power, or it can appreciate while domestic inflation erodes real value. Imported prices, interest expectations and capital flows link the two but do not make them identical.

If a currency falls 10% against the dollar, imported fuel may become dearer and raise domestic prices, but the size of the internal effect depends on pass-through and the share of imports.

A “strong currency” can refer to an exchange rate or domestic purchasing power; name which one is meant.