>> Why do some countries
export more than they import?

And why do others import
more than they export?

And is now a good
time to travel abroad?

The answers to all of
those questions come

down to exchange rates.

The nominal exchange
rate is the number

of foreign currency
units that $1 will buy.

So if $1 trades for 120
Japanese yen, the U.S.

/Japan exchange rate is $1.20.

That means that if I want
to buy a Japanese car

that costs three million yen,

I will have to gather
up $25,000 to buy it.

Likewise, if a Japanese person
wants to stream a movie made

in the U.S. for $5,
they'll need to gather

up 600 yen to pay for it.

Now consider what happens
when the exchange rate rises.

Say that $1 trades for 150
Japanese yen, up from 120.

So now I only need
about $20,000 to buy

that car even though its
price in yen hasn't changed.

At the same time, the Japanese
person will need to gather

up 750 yen to stream
that $5 U.S. movie.

When the exchange rate rises,

we say that the dollar
has appreciated.

It's like each dollar
has gotten more powerful.

So you need fewer of them to
purchase something abroad.

At the same time, people in
foreign countries need to gather

up more of their currency
to buy something made

in the U.S. Now consider
what happens

when the exchange rate falls.

Say that $1 trades for
only 100 Japanese yen.

So now to buy that
three million yen car,

I need to gather $30,000.

At the same time, the Japanese
person will only need to gather

up 500 yen to stream
the $5 U.S. movie.

When the exchange rate falls,

we say that the dollar
has depreciated.

It's like each dollar
has gotten less powerful.

So you need more of them to
purchase something from abroad.

At the same time, people in
foreign countries need to gather

up fewer of their currency
to buy something made

in the U.S. All of
this is crying

out for a graph so here it is.

The exchange rate is on the
vertical axis, and the volume

of imports and exports
is on the horizontal.

At low exchange rates,
dollars aren't very powerful,

so it takes a lot of them to buy
something from another country.

So imports are low.

But at high exchange
rates, we only need a few

of those powerful dollars
to buy foreign good.

So imports are a lot higher.

That gives us an upward
sloping relationship

between imports and
exchange rates.

At low exchange rates, people in
other countries don't need money

of their currency units to
buy something from the U.S.,

so they buy a lot and the
exports from the U.S. are high.

But at high exchange rates,
people in foreign countries have

to gather many of their
currency units to buy something

from the U.S. So
they buy very little.

So exports from the
U.S. are low.

That gives a downward
sloping relationship

between exports and
exchange rates.

Now you want to focus on where
those two lines across and say

that that's the equilibrium.

Fight the urge.

Unlike supply and demand,
there's nothing to say

that the exchange rate must land
where imports equal exports.

Fact, the exchange rate
is usually somewhere else,

and that's what drives
the difference

between a country's
imports and exports.

When the exchange rate is
high, imports are high,

exports are low, and the
country runs a trade deficit.

When the exchange rate
is low, imports are low,

exports are high, and the
country runs a trade surplus.

What moves that exchange
rate around?

The exchange rate moves
in response to the demand

for a country's currency which
usually reflects the strength

of its economy relative
to other countries.

And the level of
its interest rates

in investment returns
relative to other countries.

So if you want to travel abroad,

wait until your currency
appreciates,

and then you can
do it on the cheap.

But if your currency
depreciates,

time for a staycation
[phonetic].