Saturday, November 13, 2010

U.S. - China Currency Rap

You will want to watch this before using in class (HT to the folks at Chartporn). It may not be appropriate in some settings. I'm thinking high schools and lower will have more problem with it than colleges. There are also some oversimplifications; but I think it can be good discussion starter. I'm not going to embed it for now, but I may change my mind.


Matt Lopez said...

I found this video ammusing and very entertaining. I even felt that if this video was shown in my class it would be easier to interpret the understanding and points between the USA and China economies. I understand that the Chinese government wants to keep the Yuan at a lower rate of exchange, but i don't exactly understand why? Can you please explain that more. Thank you

Tim Schilling said...

When a nation's currency is "weak" relative to another nation's currency, it enjoys an artificial advantage in trade.

In this case, China's yuan is undervalued relative to the dollar. That means that Chinese goods can be bought cheaply with U.S. dollars, and U.S. goods are more expensive when purchased with yuan.

When currencies are allowed to float, instead of being pegged like the yuan, that imbalance becomes self-correcting.

Matt Lopez said...

So if the yuan is so low then its cheaper for lets say wal mart to buy all their goods from china therefore increasing their economy and lowering the USAs? But what i don't get either is if Chinas prices are so low then if Walmart buys one billion yuans worth of goods from china and 500 million dollars worth of goods from the USA wouldnt the prices balance out due to the different rates of the money? sorry my question is kind of confusing but its just asking if the rates are different woudlnt a larger number of goods need to be mass produced from china to increase economic growth?

Tim Schilling said...


To answer your question, go to the definition of the components of GDP. Change in GDP is how we measure growth.

But a more fundamental question is not "how much is imported from China" but "what is imported from China?"

Do we purchase low-cost, low-skill products or high-cost, high-skill products? Even then, you have to consider how imports are counted. Generally, they are counted as coming from the most recent country to contribute. Thus, you may have a piece of electronic equipment that contains components from various countries in Europe, Asia, even North America. But if the final assembly (relatively unskilled) was in China and then shipped to the U.S., it's counted as a Chinese import.

Back to video, if currencies float, a country with a huge trade surplus should see its currency strengthen, making it more advantageous to import and less advantageous to export.

Remigio Mundo said...

Mr. Schilling,

A floating exchange rate is constantly changing, so in reality, no currency is wholly fixed or floating, correct?

Also doesnt the American Government have the ability to press an embargo on China's exports? I could see why economically speaking it's not a good thing but theoretically they could. Thus helping the USA economy get back to producing and exporting rather than importing.

Alex Gaston said...

This video was pretty hilarious. Until I read the caption for this video, I was thinking this had to do with the G20 summit. I understand that the U.S. is upset because of China somewhat "monopolizing" the free trade market with a depreciated currency, but why exactly is China upset with the United States? Can you explain this further.

Tim Schilling said...


China is basically upset because they view our pressure to let their currency float as interfering in their internal policies.

Any nation resents being told what to do.

And let's not forget, some of the bad mortgages that precipitated the recent downturn were sliced, diced and repackaged and sold to investors around the world - including China. Many of those purchasers were left holding the bag.