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Video transcript

what I want to do in this video is think about how exchange rates can affect trade and actually we can even think a little bit about how they might be able to affect each other although we'll go into a lot more depth in that in future videos so let's just imagine a situation where the Chinese Wan Chinese Wan depreciates versus the dollar depreciates versus the US dollar to be clear US dollar and to visualize what we're talking about let's draw the supply and demand or the exchange market for the Chinese one so our horizontal axis would be quantity quantity of one and then our vertical axis would be the price of one in terms of dollars so dollars per one and we've seen this before this right here would be the supply of Juan so these would be the people who are holding Juan but might be willing to exchange them into dollars and then this would be the demand for one these are the people who are holding dollars who might be interested in exchanging them for one and there will be some equilibrium exchange rate let's call that C sub one and let's call this and some equilibrium quantity per time period let's say it's call that Q sub one and just to be clear this is our supply curve for the one and this is our demand curve for the one and so a situation where the Chinese wan depreciates versus the dollar there's two ways really that that could happen one you could have the demand for the wan shift to the left or you could have the supply of wan shift to the right the demand shifting to the left would mean for some reason people who hold dollars are less interested in getting wan and supply shifting to the right would mean people who old Wan are all of a sudden more interested in getting dollars so actually let's just do the latter one so let's say the supply shifts to the right I just want a scenario where we have the Chinese wan depreciating against the US dollar and so you see very clearly in this world if our demand it does not shift we get to this next equilibrium exchange rate a sub two and there's also a different equilibrium quantity but you can see the Chinese want has depreciated versus a dollar if East sub 1 maybe East sub 1 is 15 cents per Chinese wan and maybe e sub 2 is 10 cents per Chinese one but now we oughtn't that we understand we can visualize what we're talking about what would be the impact on trade and I'm going to think about it in two ways what is going to happen in China let's think about China first so in China or we're gonna be thinking about the Chinese consumers well Chinese consumers they hold one and they might buy some American goods and what would happen to the cost of those American goods well assuming that the American suppliers offer their products in a fixed dollar price so let's say you are General Motors an American car company and there's a car that's manufactured the United States and it costs 20 thousand dollars well in a world where the Chinese wond appreciates versus the dollar the amount of wan to equal 20 thousand US dollars has now increased you need more one per dollar because you're in a world where there's fewer dollars per wan so American goods American goods more expensive in China I expensive in China and so what would might that do to the behavior how might people decide to trade-off between American and Chinese let's say in this example cars well if American goods in this example car has become relatively more expensive then they're likely to buy fewer American cars and so if we're talking about all American products we could say American American imports into China into China will go down because they're going to be relatively more expensive now what about in the United States in the United States what is going to happen well assuming that Chinese goods are offered by the supplier at a fixed Wan price well now you need fewer dollars per wan so Chinese goods Chinese goods are going to be less expensive less expensive to American buyers so less expensive in the US because each dollar is going to buy more Wan and assuming to the goods or have a fixed price in wine and so you could say Chinese imports into imports into the US are going to go up and what's interesting is that you might have a little bit of a negative self-correcting feedback loop because what's likely to happen if American imports into China go down well that means that fewer Chinese folks are going to be interested in converting their wan into US dollars in order to buy goods because they're not buying as many American goods and so that might have the effect of shipping shifting the supply curve back to the left similarly in a world where Chinese imports in the United States go up well now all of a sudden more Americans will be interested in converting their dollars into wan and so that might shift the demand curve to the right and so that might either of these could have the effect of maybe helping the Chinese Wan appreciate a bit now in previous videos we've talked about many factors that could shift the supply or demand curve for a currency to the right or the left but it would be interesting to think about what would be the effects of interest rate changes in each country and now we can link it not just to what would happen to the supply and demand curve but we could think about how that might affect trade let's imagine a situation where the US government government increases borrowing and we've talked about this in previous videos that will likely lead to increased interest rates because you'd have a big borrower here you could even have a crowding out effect because of the increased interest rates fewer private borrowers in the u.s. might borrow but this would increase likely doesn't always increase interest rates interest rates in the US now if you have increased rates in the US what might happen for folks in China well they might say hey we are more interested in holding dollars because we could in a dollar a bank account all of a sudden we get more interest and so that could have the effect that we saw earlier where it could say hey more Wan holders are interested in converting into the US dollars so it would shift the supply of wan to the right which would have the impact of depreciating the chinese wand which is where we started this video and so you could see something like the US government borrowing which increases interest rates can actually have an impact on trade it could actually make American Goods less competitive in China and Chinese Goods more competitive in the United States and I just did a scenario where the supply curve shifts to the right but you could also imagine a situation where government borrowing increasing the interest rate in the United States could even change the demand curve remember the demand curves going to be determined by the sentiment from dollar holders and how much they want to convert to the wan but if interest rates in the United States go up well now they might say hey I might want to save in the United States as opposed to investing in China or converting my money to wan and saving in chinese bank accounts so I'll leave you there the big thing to appreciate here is that exchange rates and trade are very linked and that things like government borrowing can affect interest rates which can affect exchange rates which can affect trade
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