If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:3:01

Video transcript

for the sake of simplicity let's assume that the current conversion rate is six Chinese when per one US dollar and at that exchange rate China is exporting 50 million dollars worth of goods to United States and the u.s. is exporting 20 million dollars worth of goods to China so clearly there's a trade imbalance the u.s. is importing 50 million dollars worth of goods and it's exporting 20 million dollars worth of goods so that has a 30 million dollar trade deficit now in this situation the Chinese manufacturer is going to have 50 million dollars that it wants to convert from the rich revenue in America and convert that to Chinese currency the American the American manufacturers want it going to want to convert its UN into 20 million dollars so the supply of the supply of dollars which is this 50 million right over here it's going to be much greater than the demand which is the 20 million dollars so in if the currencies were allowed to float the dollar would weaken the cost of the dollar would go down its supply is so much bigger than the demand but let's say that the Chinese central bank does not want that to happen so this is the people's this is the People's Bank of China they do not want they do not want the currency the the Chinese currency to strengthen because of that were to happen then Chinese goods would become more expensive in the United States it would be harder to maintain this trade imbalance they want it so what they do is they essentially make up for the difference in demand for the dollar right here there's only demand for 20 million dollars their supply of 50 so what they do is they create demand for 30 million dollars and the way that they create demand for 30 million dollars at that exchange rate is that they can literally they can literally print create 180 they can literally create 180 million un and then an exchange rate of 6 to 1 that would essentially and they would go out there into the open markets and try to convert this into dollars and so this would create demand for an incremental 30 million dollars and so when they do that the total demand for dollars is there 30 million plus the 20 million dollars from the American manufacturer that will completely equal the supply of dollars at that exchange rate and so it will not cause the exchange rate to fluctuate or the balance of trade to change so this is clearly a very simplified example so much of the the actual numbers are much larger than in the millions they're in the they're in the hundreds of billions of dollars but this gives at least in my mind a respectable idea of how the Chinese central bank is actually keeping its currency pegged to the dollar and how that's helping to maintain a trade imbalance this is Salman Khan of the Khan Academy for CNBC