The relationship between the Current Account Balance and Exchange Rates
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- เผยแพร่เมื่อ 23 ก.พ. 2012
- This lesson will illustrate how trade flows should lead to appreciation and depreciation of currencies in a floating exchange rate system, and then explain how in the case of China, central bank policy aimed at buying large quantities of US government debt keeps the supply of Chinese currency high in the US and the demand for US dollars high in China. This means the dollar remains stronger than it otherwise might relative to the Chinese RMB, contributing to the persistent trade deficits the US exhibits in its trade with China.
Want to learn more about economics, or just be ready for an upcoming quiz, test or end of year exam? Jason Welker is available for tutoring, IB internal assessment and extended essay support, and other services to support economics students and teachers. Learn more here! econclassroom.com/?page_id=5870
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My Favorite Economics lecturer, I love how you make it so simple to understand what my real lecturer made seem very difficult, complicated and hard to understand. You are simply the best Jason Welker.
Superb explanation of exchange rates and the Balance of Trade between US and China!
What I feel is missing here is the importance of the USD’s reserve currency status. Nations like China purchase USD not exclusively to manipulate exchange rates though o doubt that’s a significant factor. They buy USD and hold it because it’s a major store of value compared to many other asset classes. And when you want to buy oil it’s generally been the USD. And when you are planning a belt and road initiative you stock up on USD to spend in these other countries. In fact, the USD being the reserve virtually guarantees trade surpluses as nations hold them for future needs.
This is one of the best explanations I've ever seen. Thank you SO much.
Great video! Great use of visuals to help the audience understand the concepts! Thanks so much:)
It's just how you look at it!
Jason, this is an excellent and very clear explanation. Thank you!
Hi Jason! This was really helpful. Thanks!! :-)
Would have liked it if you could further detail the reasons behind the
Chinese government's intention of keeping the demand for USD high in China.
Amazing explanation !!
There is something that confuses me a little and I would be happy if you could put things in order for me.
You said that if the US buys phones from China it transfers dollars to China and that is why the dollar depreciates in China.
Where do you convert the dollar? The American company converts dollars to rmb in the US and transfers rmb or directly
That the American company transfers dollars to China and there converts the dollar to RMB?
Thank you for this great explanation! I should've paid more attention in economics class.
Great video, exceptionally well explained. It would be interesting to extend this by considering what are the disadvantages and advantages for the Chinese economy when they manage their exchange rate by buying US debt.
It's very good lesson and very clear explanation, hence broaden my economy knowledge.
This is pure gold, thanks !
At 12:40 you mention the flow of dollars from china to the USA.
However, the entire point of this process is for china to demand US dollars to keep the dollar strong, not supply dollars.this is why the central bank prints tons of RNB.
This seems confusing
hi Jason....excellent tutorial but you lost me along the line. Scenario 1: Chinese exports to the US - payment to China is in $ increases supply of $ in China leads to a depreciation of the $ against RMB; in the US this causes increase in demand for RMB as Americans will sell their $ to purchase the RMB needed to pay for the imports; this drives up the demand for RMB and causes its appreciation against the US$. Scenario 2: US exports to China - payment is in $; causes increase in demand for $ in China, leads to appreciation against the RMB; how does inflow of RMB into the US come into the picture? ......shouldn't $ be inflowed to the US why the RMB....I still don't understand.....got confused there. Pls more explanation.....thanks!!
great video. You made it simple and informative. Thank you
Yo are the boss of economics! Thanks for your videos
very clearly explained, Thank you! :)
Thanks for the video! nice explanation!
This video is gold. Thanks a lot
Very nice presentation - thank you :)
very very good video, Sir, thank you.
this is really great lesson for me thank you
great, simply amazing content
Excellent video. Thanks.
Best, best ,best lecture
U The Man...!!! thanks alot.. plz upload more video like this....
Why is demand for US dollar increasing in China when Airplanes are being transferred to China as exchange is in RMB ???
Only supply side should be affected.
Hi. This video was very helpful. Where can I find this data on the internet. I looking to compare the current account of the US, China and South Africa for the last 20 years.
Awesome video!!!!
Awesome explanation
super duper clear explanation :)
You're a lifesaver
Got here cause my teacher wanted us to learn about the exchange rates. Achieved the knowledge well enough cause this video is great! Just 1 Qn.
Why dont the US govt take action to counter this problem?
special interest. As an american investor and producer, it is beneficial for me, to have a devalued chinese RMB, so its cheaper to produce in China and then resell in USA and get dollars. Remember, is not the difference in exchange rates that affects my calculation to where to produce, but also labor costs, and regulations costs. So its cheap in labor, cheap because lax regulation, and cheaper because local currency is worth less. Win, Win, Win for multinational corp. American consumer hasn't been hit too hard because they can find themselves buying cheap things eventhough wages are down, jobs are scarce, and USA keeps spending in the economy. So while the consumer is relatively happy, and multinationals are happy, why changing the current situation. Changing it will piss off consumers and producers. You can't win elections like that.
Your explanation is so naïve and simplistic, I think you're lying about being "a producer" of anything.
What a prophecy!
Thank you!
explain more details financial accounts and current account or exchange rate what is relationship?
This is perfect
For China to purchase airplanes from the US, they need US dollars, thus using RMB to purchase US dollars (increasing demand for USD). But simultaneously, US are purchasing smartphones thus increasing supply of US dollars and demand for RMB, which is where the RMB comes in.
Perfect.
The one thing I still don't understand...(since you transfer the dollar into the china side and vice versa when goods exchange), is do you have to pay for goods with the home country's currency? It looks like the Chinese will accept dollars as payment,,so why would it drive up the demand for the yuan if dollars aren't being exchanged for yuan, and rather, used for payment?
Exactly! I was under the impression that they sold smartphones to Americans for American dollars. If both countries need each other's currencies to buy each other's products, then where do either of them get the currency to begin with?
well explained
much obliged
This video is so useful. And you talk like Kevin Spacey in House of Cards. Lol
Nice explanation sir
@3:03, he spells "detifict" not "deficit" or is it just how I look at it?
keep it up sir, thanks
amazing.
Good stuff
@ANKUR BHARGAVA The following transactions take place between USA and China: The imports of mobile phones by USA & the Imports of Airplanes by China. When the mobile phones are purchased by USA from China, there is a supply of USD injected into CHINA's economy. Cutting it short, The Chinese governments incentive to intervene in the floating exchange rate system aims to increase the demand for USD, to attempt to keep its value of the Renminbi low. So if the USD is "Stronger" in comparison to the Chinese Renminbi, this is all down to the increase of demand for the USD. As mentioned, this is done intentionally/artificially by the Chinese government purchasing US owned assets, like the debt, to supply those dollars back into the US economy, thus ensuring that the demand for USD remains high and is not exceeded by supply. Think of this as being scarce. If USD is scarce, there is high demand. But if there is an excessive supply, the value of the USD will fall. Hence this scenario can be used here, as also explained in the video.
I hope this helped, or even made sense lol.(I've just about got my head around this, so please correct me if I have made any wrong statements!)
Thanks :)
Don't Chinese producers sell their goods to Americans for American dollars directly? If they sell for RMB, where do Americans get it?
can i have a transcript of this video?????
I want to ask, what's kind of app or software he used in this clip? Anyone can help me??
+Elena Yen Chi kind of looks like powerpoint.
I dont think it is ppt. Teacher can write, draw many things
The "freemarket" is not self regulating.
If the American government imposes costs on its own economy and the Chinese government directly intervenes then it is by definition not a "Free Market".
i think they just need to print more of their yuans because their population
America - R.I.P.
I don't understand why you say that China increases the demand for the US dollar by buying US treasury bills rather than saying those actions reduce the supply of dollars which brings the ER back up? Wouldn't buying T-bills reduce the supply of dollars and not increase the demand?
In fact, I think its a bit of miscommunication. In order to purchase US T-Bills China would have to own US Dollars first. How is this accomplished?
In reality I think it works like this. US wants to buy goods from China. So it has to purchase Yuan from China. Under normal circumstances if the US wants to buy product from another country it goes to the foreign exchange market to purchase the foreign currency. Thus the free market mechanism adjusts as described in the video. However, when buying Yuan from China, invariably the Yuan is purchased from the Chinese Central Bank (through the Chinese Banking System). However, rather than let the free market adjust as it normally would, China prints a blizzard of Yuan to meet the Supply of US Dollars. This effectively suppresses the US Dollar in a market where the demand for Yuan would otherwise bid up the value of the Yuan.
Once the Chinese own the Dollars, in stead of buying US products, which would redress the exchange rate imbalance, the Chinese use it to purchase Treasury Bills.
That's my understanding of the process.
i almost fell asleep listening to this but still i dont get it
A country that runes a trade surplus this year
a)has a positive net financial inflow this year
b)is in effect borrowing from the rest of the world this year
c)has bought more foreign assets this year than foreigner have bought its asset
d) has zero net financial outflow this year
Correct Ans is c but why?? My answer was A
I think it is because the balance of payment. The trade surplus is a current account surplus, it should balance the payment with financial account and capital account deficit.
This video is a very superficial explanation of how accounts are settled and valuations of currencies derived. The US is been running massive trade and government spending deficits for over 30 years but the US dollar is a strong now is that almost any point in that thirty-year period.
I fear novices will be tempted to speculate on financial assets based on such simple bits of information. Think of it this way, if you went to New York, San Francisco, and London and saw that the typical home sells for $500,000 and then you went to Detroit and realized those equivalent homes are selling for $10,000 would you go about buying up all the real estate in Detroit assuming it's going to eventually appraise at London and New York and San Francisco values?
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