Exchange Rates and Net Exports - Video Tutorials & Practice Problems

Exchange Rates and Net Exports

Alright now let's see the relationship that exchange rates have with net exports. So when we talk about the nominal exchange rate. Well that's just the exchange rate. We can get on the market. What one currency trades for another currency? Just the current exchange rate for example, you go to the bank and the bank trades 100 8 yen for $1. So if you go to the bank with $1 they'll hand you 100 and eight yen. If you go to the bank with 100 8 yen, they'll give you $1. Right? Excuse me. Of course. Sometimes they offer different exchange rates because they're trying to make a little profit. But to keep things simple, we'll say there's just this one exchange rate, right? 108 Yen for $1. Now the the exchange rate changes all the time. Right? So on a daily basis there's markets for the exchange rate where they're going up and down. So if the currency appreciates um this means that your currency can buy more of the foreign currency. Eur currency got stronger, it appreciated. The bank now offers more yen for $1. So before they were offering 100 and eight this would be a situation where they offer say 100 and 12 yen. For $1 you're getting more yen per dollar. The dollar has appreciated. So let's see what happens with appreciation. What happens to net exports in this case. So in the U. S. Dollar appreciates relative to a foreign currency. Like we saw here with the yen Then what happens? Each dollar? The U. S. Dollar can afford more or less, can we afford more japanese goods or less japanese goods we can afford more, right? If the prices are held constant and our dollar can go further, our dollar buys more yen, we can buy more stuff in japan. Right? So U. S. Dollar can afford more japanese goods when the dollar gets stronger. So our imports go up imports increase because the U. S. Dollar got stronger, we're gonna buy more foreign goods. But the opposite happens with japan because the japanese yen depreciated. There's always gonna be this inverse effect if the dollar got stronger, well the yen got weaker in relative terms because now that the japanese yen can afford less us goods right? Because it costs them more yen. Now before they could trade 108 yen for a dollar now it cost them 112 yen for a dollar. So they're gonna have to give up more of their currency to buy us goods so that the U. S. There will be less uh exports there's gonna be less demand from japan because things got more expensive for them. So the exports decrease. So notice what happens to our net exports, our exports are decreasing. And remember net exports is equal to exports minus imports right imports being m how we usually abbreviated. So if exports went down and imports went up, well then net exports really went down right? Because our our first number went down and what we're subtracting from it went up. So net exports decreases when the U. S. Dollar appreciates. So a stronger dollar leads to a a bigger trade deficit. We say right net exports decrease. Trade deficit will say now it doesn't necessarily mean a trade deficit, it just shows it's a decrease, but it leads to a trade deficit as this dollar gets stronger and stronger because of this relationship. Now let's see the opposite relationship with depreciation. So when currency depreciates, well now your currency can buy less of the foreign currency. So before the bank was offering 108 yen per dollar. Now you go to the bank and they only offer you 100 yen per dollar. Right? So you go to the bank and you were expecting to get 100 8, they only hand you 100. So you're you're getting less for your money, right? The U. S. Dollar has depreciated in this example in relative to the foreign currency. So now the U. S. Dollar can afford less japanese goods. Right? By that same logic, you're now able to get less yen for each dollar. So you can afford less stuff. So imports are going to decrease and the opposite happens for the yen. Right? The yen. Now they only need to go to the bank with 100 and they get a full dollar before they needed to go into the bank with 100 8 yen to get a dollar. So now they're getting dollars for cheaper. So the U. S. Goods just became cheaper for them and they're gonna, they can afford more U. S. Goods and exports increase. So when the when the U. S. Dollar depreciates. Well we have this the the opposite scenario, right? The exports, the exports now have increased, the imports have decreased. So net exports go up right? Net exports are going to increase here and this kind of leads to our trade surplus. Okay, so it's kind of an interesting relationship there. The dollar gets stronger. That sounds like a good thing, right? The dollar is appreciating, but how does that affect our trade situation exports go down? And when the dollar gets weaker, that sounds kind of like a bad thing. But it it helps exporting companies, right? We sell more things overseas with a weaker dollar. Alright, so there's a trade surplus there. And one note I mentioned this before already. Excuse me, is that when one currency appreciates the other currency depreciates always. There's always this relationship just like we saw when the dollar got weaker, the U. S. Dollar could only get 100 yen. Well that 100 yen is stronger for the japanese people, right? Because they're able to afford more dollars with their currency? So if the US dollar can buy more yen then the yen can buy fewer dollars and vice versa. Cool. So that's the relationship there with the currency exchange rates and net exports. Alright, let's go ahead and move on to the next video.