The relationship between the Current Account Balance and Exchange Rates

A nation's balance of payments measures all economic transactions between that nation's people and the people of all other nations. A country that spends more on imports than it earns from the sale of its exports is said to have a trade deficit. Such imbalances have become controversial topics of debate in political and economic circles, particularly over the last decade as the Chinese economy has emerged as the world's largest exporter. As goods and services flow from one country to another, the exchange rates of those countries' currencies tend to fluctuate to promote balanced trade between the two nations. However, in some cases, most notably China, a country's central bank will intervene in the market for its own currency to manage its exchange rate against that of a trading partner. When such interventions occur, the normal, moderating effect that rising and falling exchange rates has on trade flows is disrupted, and trade imbalances can become persistent. This lesson will illustrate how trade flows should lead to appreciation and depreciation of currencies in a floating exchange rate system, and then explain how in the case of China, central bank policy aimed at buying large quantities of US government debt keeps the supply of Chinese currency high in the US and the demand for US dollars high in China. This means the dollar remains stronger than it otherwise might relative to the Chinese RMB, contributing to the persistent trade deficits the US exhibits in its trade with China. http://www.econclassroom.com/?p=3057

Comments

1. Awesome video!!!!
2. Thanks for the video! nice explanation!
3. A country that runes a trade surplus this year
   a)has a positive net financial inflow this year
   b)is in effect borrowing from the rest of the world this year
   c)has bought more foreign assets this year than foreigner have bought its asset
   d) has zero net financial outflow this year
   Correct Ans is c but why?? My answer was A
4. explain more details financial accounts and current account or exchange rate what is relationship?
5. much obliged
6. Great video, exceptionally well explained. It would be interesting to extend this by considering what are the disadvantages and advantages for the Chinese economy when they manage their exchange rate by buying US debt.
7. Thank you for this great explanation! I should've paid more attention in economics class.
8. Western Union
9. Yo are the boss of economics! Thanks for your videos
10. It's very good lesson and very clear explanation, hence broaden my economy knowledge.
11. This video is so useful. And you talk like Kevin Spacey in House of Cards. Lol
12. brilliant video!!! thanks for posting.. struggling economics student. :-)
13. This video is a very superficial explanation of how accounts are settled and valuations of currencies derived. The US is been running massive trade and government spending deficits for over 30 years but the US dollar is a strong now is that almost any point in that thirty-year period.
    
    I fear novices will be tempted to speculate on financial assets based on such simple bits of information. Think of it this way, if you went to New York, San Francisco, and London and saw that the typical home sells for $500,000 and then you went to Detroit and realized those equivalent homes are selling for $10,000 would you go about buying up all the real estate in Detroit assuming it's going to eventually appraise at London and New York and San Francisco values?
14. I don't understand why you say that China increases the demand for the US dollar by buying US treasury bills rather than saying those actions reduce the supply of dollars which brings the ER back up? Wouldn't buying T-bills reduce the supply of dollars and not increase the demand? 
15. Superb explanation of exchange rates and the Balance of Trade between US and China!
16. Hi. This video was very helpful. Where can I find this data on the internet. I looking to compare the current account of the US, China and South Africa  for the last 20 years.
17. I want to ask, what's kind of app or software he used in this clip? Anyone can help me??
18. The "freemarket" is not self regulating.
19. the U.S. blame WHOM!!!???
    blame CHINA or RUSSIANS ???
    go BROKING!! the U.S. Animals~~~