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Current time:0:00Total duration:10:06

Video transcript

let's review what happened in the last video because in general it's just kind of confusing and it's always good to see it a second time and then we could think a little bit about how these market dynamics could be manipulated so that you don't have the Chinese currency getting more expensive so in the last video we started off with an exchange rate of 10:1 per dollar we saw that this manufacturer over here in China had to sell his goods for the equivalent of 10 watt in order for him to make a profit that this guy in the United States had to sell his goods abroad or we'll say in China for the equivalent of $1.00 now this exchange rate this price was $1 one u.s. dollar in the United States and at this exchange and at this exchange rate this guy had to sell his Cola for 10:1 so that he could get his dollar so we kind of just drew it out the guy would send and we said at that price so for 10:1 which was one dollar at one dollar there was demand for $100 in the United States so we saw this dynamic he would ship a hundred dollars to the United States and then the United States would ship him back a hundred dollars he would sell those dolls for essentially a dollar each he would get back a hundred dollars on the other side of the equation the cola manufacturer what if he were to sell it for 10:1 in China there's demand for 50 cans of soda so he would send 50 cans of soda to China and they would send him ten one for each can 500 won now what happened in that situation is that the Chinese manufacturer had a thousand won that he needs to convert into dollars into $100 preferably a fee if that exchange rate were fixed the American manufacturer and let's say these are the only two the only two actors in our scenario has 500 one that needs to convert into $50 so if we just look over here here's someone who wants to convert 1000 won he wants to he or he wants to convert into 1000 won let me be very careful he wants to convert his hundred dollars into 1000 won if the currency were to be held constant but there's only 501 being offered in the market there's only 501 being offered in the market so he was going to have to offer more dollars per one than he would if there was more one in the market now you can look at the other side this am an American manufacturer has 500 won from his sales in China he wants to convert it if the currency was pegged into $50 but maybe he could do better than $50 here and as we can see there's more demand to convert the 1 than there is to convert the dollars he wants to buy $50 using one this guy this guy wants to sell this wants to sell $100 into one so if you look over here the supply supply of dollars supply of dollars is much greater than is much greater than the demand then the demand for dollars and you know in anything if the supply of apples is greater than the demand for apples then the price of Apple's would go down and the opposite is happening here with the one the demand for one this is the demand the demand for one is much greater than the supply of one then the supply and we know that when the demand is greater than the supply the price needs to go up and so we saw a Senate scenario where the price of the dollar will go down in terms of 1 now all that means is if you have to give 10:1 per dollar now you're gonna have to give fewer one per dollar the price of the one was good go down if the price of Apple's in Wan's goes down instead of offering a 10 Apple 10 one per Apple you probably offer 8 one per Apple so we see the exact same thing for the price of the dollar but that's equivalent to saying that the price of a 1 goes up and we said eventually and I'm just making this number up it's hard to predict what the actual settling price would be we eventually get to eight one per dollar and then we said at that exchange and actually I'm going to change the numbers a little bit just to make it a little bit cleaner at that exchange rate at 8 1 per dollar these 10 and all these 10:1 dolls would now cost $1 25 and let's say that at $1 25 in the United States there is demand for 60 let me make that there's demand for $60 I'm changing the numbers a little bit from the last video just to make the numbers work out a little bit better so you could just ignore the numbers from the last video and remember the old demand when the 10:1 dolls were only $1 so the old demand old demand old Amman we have it up here was a hundred dolls was 100 100 dolls so it makes sense if dolls are $1.00 people are going to buy we are going to have more of them if dolls go up to a dollar 25 the demand will go down and say they'll go down to 60 dolls now on the other side of the equation the $1 can of soda at 8 one per dollar will now sell in China for 8 1 and remember remember what the old price was the old price in China when the currency rate was 10 to 1 was 10 1 so the price so the let me write it here the price the price of the cola went from 10 1 10 one down to down to 8 1 so the demand now that the cola is cheaper in China the demand went up and I'll change this number too so don't do the 80 cans we'll say that the demand the demand in China went from 50 cans we saw that up here he had to ship 50 cans when it costs 10 won per can so it went from 50 cans up to and maybe I should make it go up the demand went from 50 up to let's say 75 cans 70 75 cans just like that I'm using these numbers because it's going to lead to cleaner numbers so now what is the actual scenario and the last video I said work it out yourself but I realize the more concrete examples of this the more it'll kind of sink into your brain so now what is the trade balance going on so going from China so if we look at so China China and then you have the you is China and the US over here we're going to be shipping we are now going to only be shipping 60 dolls so 60 60 dolls and then the u.s. is going to ship back 60 times a dollar 25 that is $75 right one dollar 25 for 60 dolls means you're going to get $75 so 75 US dollars are going to go back to China so that's due to the dolls and I'll let's think about what's going to happen due to the soda we are going to have we're going to have 75 cans of soda 75 cans of soda let me write 75 cans are going to be shipped to China and then China is going to send back what 75 cans at eight at eight one per can at eight one perk and 75 times eight is 75 times eight is what is that seven it's 55 six it's 600 so for those 75 cans he is going to get back 601 he is going to get back 600 601 so now what's happening the Chinese manufacturer over here on the Left wants to convert so wants or needs to convert wants to convert wants to convert what does he have he has $75 wants to convert $75 into if we assume that a with the currency is now eight and he says well just get it at the market rate into roughly 600 one into six hundred one right 75 times eight is 75 times eight is six hundred eight ones per dollar and then the u.s. manufacturer wants to convert once to convert wants to convert he's got 601 601 from his sale of soda into and if he assumes he can get kind of the last market rate 600 divided by eight is into $75 $75 so what just happened here now the supply of dollars this is the supply of dollars is equal to the demand for dollars and also the supply of one the supply of one right over here is equal to the demand for one so now we are depending how you view it we're sending the same dollar value to the US as we're sending back to China or we're sending the same one value to the US as we're sending back to China and the currency has has is now in balance it really shouldn't shift and so I want I really wanted to go through this example again to show you that when you have freely floating currencies eventually the the trade should one currency should get more if there is a trade imbalance one currency will become more expensive than the other until the demand equalizes in both countries so that you eventually do have a trade balance hopefully that doesn't confuse you too much in the next video we'll talk about how a government and we'll talk about the Chinese central bank in particular could intervene so that this doesn't happen so that they can always ship more to the US than the US ships to China