Imports, Exports, and Exchange Rates: Crash Course Economics #15 [STARTS AT 5:26] ADRIENE: Trade between countries depends on the demand for a country's goods, political stability and interest rates, but one of the most important factors is exchange rates. Basically this is how much your currency is worth when you trade it for another country's currency. And let's engage in some foreign trade now by going to the Thought Bubble. Suppose the US-Mexico exchange rate is 15 pesos to the dollar. If an American's on vacation in Mexico and wants to buy some sunscreen that cost 60 pesos, they'll have to trade four dollars for pesos. Likewise if someone from Mexico is on vacation in the US and wants to buy a $20 t-shirt she will need to exchange 300 pesos for dollars. Now let's think about what happens if the exchange rate goes up to twenty pesos per dollar. Now to buy that 50 peso sunscreen in mexico it'll cost the American tourist $3 instead of four. We say that the dollar has appreciated. At the same time the Mexican tourist who wants to buy the $20 t-shirt will need four hundred pesos instead of 300. It works the same way with imports and exports. When the dollar appreciates, it gets cheaper for US consumers to import foreign goods, and US exports to other countries get more expensive. US imports rise and export fall. On the other hand what if the exchange rate fell to 10 pesos per dollar? Now to buy that sunscreen, the american tourist needs $6. Each dollar has gotten less powerful. We say that the dollar has depreciated. At the same time, the Mexican tourist who wants to buy the $20 t-shirt needs only two hundred pesos. So when the dollar depreciates, foreign imports get more expensive which means they fall, and US exports to other countries get cheaper which means they rise. JACOB: Most currencies, like the peso and the dollar have floating exchange rates that change based on supply and demand. Like when the US imports more products from Mexico, they exchange dollars for pesos. This will increase the demand for pesos, and peso will appreciate. At the same time, the dollar will depreciate. Now some countries have elected to peg their currency to another currency. This is when a country's central bank wants to keep the exchange rate in a certain range, and they buy or sell currencies to keep it in that range. The Chinese government was well known for buying US dollars to keep the Chinese currency artificially depreciated. When the US's importing goods from China, the yuan would appreciate. Then the Chinese government would turn around and buy dollars which kept the exchange rate about the same. This kept Chinese exports cheap for Americans. [ENDS AT: 7:47]