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 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. So the last video, we started

off with an exchange rate of CNY 10 per dollar. 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. 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. So we kind of just

drew it out. 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. So we saw this dynamic,. He would ship 100 dolls to the

United States and then the United States would ship

him back $100. He would sell those dolls for

essentially $1 each, he would get back $100. 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. So he would send 50 cans of soda

to China and they would send them CNY 10 for

each can, CNY 500. 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. 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. So if we just look over here,

here’s someone who wants to convert CNY 1,000. Or he wants to convert

into CNY 1,000, let me be very careful. He wants to convert his $100

into CNY 1,000 if the currency were to be held constant. But there’s only CNY 500 being

offered in the market. So he was going to have to offer

more dollars per Yuan then he would if there was

more Yuan in the market. Now you can look at it

from the other side. This American manufacturer

has CNY 500 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 Yuan than there is to

convert the dollars. He wants to buy $50

using Yuan. This guy wants to sell

$100 into Yuan. So if you look over here, the

supply of dollars is much greater than 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 apples would go down. And the opposite is happening

here with the Yuan. The demand for Yuan– this is

the demand– is much greater then the supply of Yuan. And we know that when the demand

is greater than the supply, the price

needs to go up. And so we saw a scenario where

the price of the dollar will go down in terms of Yuan. 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. The price of Yuan

would go down. If the price of apples in Yuan

goes down, instead of offering CNY 10 per apple,

you’d probably offer CNY 8 per apple. So we see the exact same thing

for the price of the dollar. But that’s equivalent

to saying the price of a Yuan goes up. 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. 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. And let’s say that at $1.25, in

the United States, there is a demand for 60 dolls. 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 can just ignore the

numbers from the last video. And remember, the older demand

when the 10-Yuan dolls were only $1, so the old demand

was 100 dolls. So it makes sense. If dolls are $1, people are

going to have more of them. If dolls go up to $1.25, 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 CNY 8 per dollar will now

sell in China for CNY 8. And remember what the

old price was. The old price in China where the

currency rate was 10 to 1 was CNY 10. So the price– let me write it

here– the price the cola went from CNY 10 down to CNY 8. 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 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. I’m using these numbers because

it’s going to lead to cleaner numbers. So now what is the

actual scenario? 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. So now what is the trade

balance going on? So going from China, and then

you have the U.S. Over here we’re going to be shipping

60 dolls. 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. So $75 is going to

go back to China. So that’s due to the dolls,

and now let’s think about what’s going to happen

due to the soda. 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. 75 times 8, 600. So for the 75 cans, he is going

to get back CNY 600. So now what’s happening? 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. 75 times 8 is 600. CNY 8 per dollar. 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. So what just happened here? Now the supply of dollars

is equal to the demand for dollars. And also, the supply of Yuan

right over here is equal to the demand for Yuan. 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. And the currency is

now in balance. It really shouldn’t shift. 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. 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.

brilliant – thanks