Currency effect on trade review발음듣기
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Currency effect on trade review
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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.발음듣기
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And then we can think a little bit about how these market dynamics could be manipulated so that you don't have the Chinese currency getting more expensive.발음듣기
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We saw that this manufacturer over here in China had to sell his goods for the equivalent of CNY 10 in order for him to make a profit and that this guy in United States had to sell his goods abroad - or we'll say in China - for the equivalent of $1.발음듣기
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Now it's this exchange rate, this price was $1 and at this exchange rate, this guy had to sell his cola for CNY 10 so that he could get his dollar.발음듣기
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And we said at that price, so for CNY 10 which was $1, at $1 there was demand for 100 dolls in the United States.발음듣기
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He would ship 100 dolls to the United States and then the United States would ship him back $100.발음듣기
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On the other side of the equation, the cola manufacturer, if he were to sell it for CNY 10 in China, there's demand for 50 cans of soda.발음듣기
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So he would send 50 cans of soda to China and they would send them CNY 10 for each can, CNY 500.발음듣기
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Now, what happened in that situation is that the Chinese manufacturer had CNY 1,000 that he needs to convert into dollars, into $100 preferably, if that exchange rate were fixed.발음듣기
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The American manufacturer, and let's say that these are the only two actors in our scenario, has CNY 500 that he needs to convert into $50.발음듣기
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So he was going to have to offer more dollars per Yuan then he would if there was more Yuan in the market.발음듣기
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He wants to convert it if the currency was pegged into $50, but maybe he could do better than $50 here.발음듣기
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And as we can see, there's more demand to convert the Yuan than there is to convert the dollars.발음듣기
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So if you look over here, the supply of dollars is much greater than the demand for dollars.발음듣기
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And you know in anything, if the supply of apples is greater than the demand for apples, then the price of apples would go down.발음듣기
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Now all that means is if you have to give CNY 10 per dollar, now you're going to have to give fewer Yuan per dollar.발음듣기
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If the price of apples in Yuan goes down, instead of offering CNY 10 per apple, you'd probably offer CNY 8 per apple.발음듣기
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Now 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 CNY 8 per dollar.발음듣기
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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 bi cleaner - at that exchange rate, at CNY 8 per dollar, these 10-Yuan dolls would now cost $1.25.발음듣기
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I'm changing the numbers a little bit from the last video just to make the numbers work out a little bit better.발음듣기
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And remember, the older demand when the 10-Yuan dolls were only $1, so the old demand was 100 dolls.발음듣기
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Now on the other side of the equation, the $1 can of soda at CNY 8 per dollar will now sell in China for CNY 8.발음듣기
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We'll say that the demand in China went from 50 cans, we saw that up here - he had to ship 50 cans when it cost CNY 10 per can - So it went from 50 cans up to - maybe I make it go up - the demand went from 50 up to, let's say, 75 cans.발음듣기
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In the last video I said work it out yourself, but I realize the more concrete examples of this, the more it will kind of sink into your brain.발음듣기
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So going from China, and then you have the U.S. Over here we're going to be shipping 60 dolls.발음듣기
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And then the U.S. is going to ship back 60 times $1.25, that is $75, right? $1.25 for 60 dolls means you're going to get $75.발음듣기
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So that's due to the dolls, and now let's think about what's going to happen due to the soda.발음듣기
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We are going to have 75 cans of soda are going to be shipped to China and then China is going to send back 75 cans at CNY 8 per can.발음듣기
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The Chinese manufacturer over here on the left wants to convert $75 into - if we assume that the currency is now eight, and he says, well, I'll just it get at the market rate - into roughly CNY 600.발음듣기
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And then the U.S. manufacturer wants to convert - He's got CNY 600 from his sale of soda and, if he assumes he can get kind of the last market rate, 600 divided by 8 is into $75.발음듣기
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So now, depending on how you view it, we're sending the same dollar value to the U.S. as we're sending back to China, or we're sending the same Yuan value to the U.S. as we're sending back to China.발음듣기
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So I really wanted to go through this example again to show you that when you have freely floating currencies, eventually one currency should get more - if there is a trade imbalance - expensive than the other until the demand equalizes in both countries so that you eventually do have a trade balance.발음듣기
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Hopefully that doesn't confuse you too much, and 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 U.S. than the U.S. ships to China.발음듣기
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