馃攳
Supply and demand curves in foreign exchange | AP Macroeconomics | Khan Academy - YouTube
Channel: Khan Academy
[0]
in a previous video we've given an
[2]
intuition on what foreign exchange
[4]
markets are all about in particular we
[6]
talked about the foreign exchange market
[8]
between the u.s dollar and the chinese
[11]
wan what we're going to do in this video
[14]
is think about the same idea but think
[15]
about it in terms of graphs and the
[17]
types of economic models that we're used
[19]
to seeing in an introductory
[21]
macroeconomics course so what we're
[24]
going to focus on in this video is the
[26]
foreign exchange market
[29]
exchange
[32]
market
[35]
for
[36]
the chinese
[39]
one now we're going to think about it in
[41]
terms of supply and demand curves it can
[43]
be a little bit confusing because we're
[45]
going to be thinking of the price of the
[47]
juan in terms of another currency in
[50]
this case the dollar although you could
[51]
do it in terms of other currencies the
[53]
pound the euro or whatever else now this
[56]
can be a little bit confusing because
[57]
we're going to be thinking about
[58]
currency on both axes but let's first
[61]
think about the horizontal axis that
[63]
when we're thinking about most markets
[65]
that is our quantity axis and here once
[68]
again we want to think about quantity
[69]
we're going to think about the quantity
[72]
quantity of chinese
[76]
of chinese
[77]
one and then our vertical axis we're
[80]
essentially going to be thinking about
[81]
the price of the chinese one but how do
[84]
you think about the price of a currency
[86]
well we're going to think of it in terms
[88]
of another currency and for the sake of
[90]
this video that other currency is going
[91]
to be the u.s dollar so this is going to
[94]
be u.s
[96]
u.s dollars
[98]
dollars
[100]
per
[101]
chinese
[103]
chinese one and i encourage you pause
[106]
this video think deeply about why it's
[108]
u.s dollars per chinese won as opposed
[110]
to chinese won per u.s dollars and think
[113]
about why i put the quantity of chinese
[115]
won here instead of the quantity of u.s
[117]
dollars because this is the foreign
[119]
exchange market for the chinese one i
[122]
could have done another chart where it's
[123]
a foreign exchange market for the us
[125]
dollar in which case then my quantity
[127]
would be us dollar and then i would
[129]
think of how much of some other currency
[131]
per us dollar so i would say maybe how
[133]
much chinese won per us dollar but
[136]
here's the other way around i'm in the
[138]
market for the chinese one
[140]
so let's think about the supply and
[141]
demand curves and which way they would
[143]
work
[144]
well imagine that people are offering
[147]
very few us dollars per chinese one well
[150]
in that world a lot of people might not
[152]
want to convert their want into dollars
[153]
they might not offer them up to up for
[156]
supply to be converted into us dollars
[159]
and so the quantity of chinese won if
[162]
the price for the chinese one is low
[164]
might be pretty low
[166]
and as the price people are willing to
[167]
pay in terms of dollars goes up well
[170]
more and more people might be willing to
[172]
transact
[173]
so our supply curve and here we're
[175]
talking about the supply for chinese one
[179]
is likely to increase as people are
[182]
willing to pay more for those wants and
[184]
this is like many markets that we've
[185]
seen before this is just a little bit
[187]
less intuitive because we're thinking
[188]
about markets for one currency in terms
[191]
of another currency
[192]
now what about the demand curve
[195]
well the demand curve is going to look
[196]
like a lot of demand curves we've seen
[198]
if the price of a chinese won is high
[201]
well very few people are going to demand
[203]
it and as the price of the chinese won
[205]
in terms of dollars is lower and lower
[207]
more and more people might demand more
[210]
chinese one because like hey it's
[212]
cheaper now in terms of u.s dollars so
[214]
this is what a demand curve might look
[216]
like
[217]
and as you could imagine this point is
[219]
our equilibrium point and it would tell
[221]
us our equilibrium exchange rate and so
[224]
we could call that our equilibrium
[225]
exchange rate and this would be our
[228]
equilibrium our equilibrium quantity
[232]
so for example
[234]
let's say that our equilibrium quantity
[236]
and let's say this is the quantity that
[238]
changes hands in some time period so
[240]
let's say per day let's say our
[242]
equilibrium quantity is equal to
[245]
one thousand one
[248]
one thousand
[250]
one
[252]
let me just call this q sub 1 is 1001.
[255]
these numbers are very low real exchange
[256]
markets we might be talking about
[257]
billions or tens or hundreds of billions
[259]
or even sometimes trillions of various
[262]
currency but let's just say for argument
[263]
it's 1 000 won is our current
[266]
equilibrium exchange quantity per day
[269]
and let's say this exchange rate e sub 1
[271]
is equal to 10 cents per one so 10
[276]
10
[278]
cents or one tenth of a u.s dollar
[280]
per chinese one so that's our current
[284]
exchange rate now let's say for some
[286]
reason all of a sudden americans are
[289]
very become increasingly interested in
[292]
converting their currency maybe they
[294]
want to invest in china maybe all of a
[296]
sudden the chinese say hey americans
[298]
come buy property in china a lot of
[300]
people are interested
[301]
well what would happen here
[303]
well then the demand for juan would
[305]
increase because you could only buy that
[306]
property in china with one not with us
[309]
dollars
[310]
and so what would happen here well your
[312]
demand curve would shift to the right
[314]
like we've seen before and so if we call
[316]
this d1
[317]
then we could get to a new demand curve
[320]
that might look something like this
[322]
d2
[324]
now what would happen if our equilibrium
[327]
exchange rate doesn't change
[329]
well if this is our exchange rate if
[331]
this were to stay our exchange rate
[333]
now all of a sudden a higher quantity is
[336]
being demanded then is being supplied
[339]
the americans in this situation or it
[340]
actually doesn't even have to be
[341]
americans it could just be whoever's
[343]
holding u.s dollars there's demand for
[345]
more than a thousand won per day maybe
[348]
this is 1500 won or whatever it might be
[351]
and so what you would naturally see is
[353]
that the price of the wand in terms of
[356]
us dollars will go up until you get to
[358]
an equilibrium point and on the first
[360]
video when we talk about the intuition
[362]
of foreign exchange markets we talk
[364]
about why this would be so you would
[366]
then get to a new equilibrium
[368]
right over here this is e sub 2 and a
[372]
new equilibrium quantity let's call this
[375]
q2 our new equilibrium quantity q2 might
[379]
be 1200 won per day versus 1001 per day
[384]
and our new equilibrium exchange rate
[386]
maybe this is now equal to 15 cents
[389]
per one instead of 10 cents for one
[393]
so big picture you can think of the
[395]
foreign exchange market in a lot of ways
[397]
like we've looked at other markets in
[399]
macroeconomics it's just a little bit it
[402]
takes a little bit of an intuitive leap
[403]
to just think about the market for one
[405]
currency in terms of another
Most Recent Videos:
You can go back to the homepage right here: Homepage