“A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

Apr 11 2011

“A glimmer of hope” – rising incomes in China lead to rising demand for US exports

A nation’s balance of payments measures all the transactions between the residents of that nation and the residents of foreign nations, including the flow of money for the purchase of goods and services (measured in the current account) and the flow of financial or real assets (measured in the financial or capital account). The sale of exports counts as a positive in the current account, while the purchase of imports counts as a negative. In this way, a nation can have either a positive balance on its current account (a trade surplus) or a negative balance (a trade deficit).

The US has for decades run persistent deficits in its current account. As the world’s largest importer, Americans’ appetite for foreign goods has been unrivaled in the global economy. Of course, this is not to say that the US has not been a large exporter as well. In fact, the US is also one of the largest exporting nations, along with China, Germany and Japan, in the world. However, the total expenditures by Americans on imports has exceeded the country’s income from the sale of exports year after year, resulting in a net deficit in its current account.

So the news that rising incomes in China have fueled a boom in US export sales should come as a relief to US politicians and more importantly, firms in the American export industry:

Last year, American exports to China soared 32 percent to a record $91.9 billion.

A study by a trade group called the U.S.- China Business Council says China is now the world’s fastest-growing destination for American exports.

While United States exports to the rest of the world have grown 55 percent over the past decade, American exports to China have jumped 468 percent.

Most of those exports have come from California, Washington and Texas, which have shipped huge quantities of microchips, computer components and aircraft. But states that produce grain, chemicals and transportation equipment have also benefited.

China, which last year surpassed Japan to become the world’s second largest economy (measured by total output), is soon expected to become the world’s second largest importer as well:

And while much of what China imports is used to make goods that are then re-exported, like the Apple iPhone, Mr. Brasher says a growing share of what China imports from the United States, including cotton and grain as well as aircraft and automobiles, is staying in China.

“You know all those BMW X5 S.U.V.’s that are in China? They’re being imported from the U.S.,” Mr. Brasher said in a telephone interview Thursday. “They’re being made by a BMW factory in South Carolina.”

All this must be good news for the US, right? Growing exports to China must mean a smaller current account deficit, greater net exports and thus stronger aggregate demand, more employment and greater output in the United States. However, this may not be the case. While exports to China grow, the US economy’s recovery has led to a boost in the demand for imports from China as well. So, ironically, even as exports have grown 468 percent in the last decade, the US has still managed to maintain a stunningly large trade deficit with China: 

Last year, China’s trade surplus with the United States was between $180 billion or $250 billion, according to various calculations.

Still, the combination of a weakening American dollar and China’s growing economic clout is likely to bode well for American exports. With China short of water and arable land, exports of crops to China jumped to $13.8 billion last year.

Study the graph below and answer the questions that follow.

Discussion Questions:

  1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
  2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
  3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
  4. The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
  5. If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

43 responses so far

43 Responses to ““A glimmer of hope” – rising incomes in China lead to rising demand for US exports”

  1. Eamon Stensonon 11 Apr 2011 at 10:39 am

    What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    That the Chinese middle class has grown which makes them richer which will make them demand more products from the US.

    What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    the Chinese have imported Intermediate goods which are goods that are not finished for example cotton which would be produced to make t-shirts or computer parts that are made into commuters. As Income Rises they will demand more goods such as cars or phones. This will make the Chinese import more as america has the comparative advantage.

    How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    The US still buys more then it sells which would account in a trade defiecent which is a determinate of AD this would shift it to the left.

  2. Graham N.on 11 Apr 2011 at 10:40 am

    1. The primary determinant of demand for exports that has lead to the observed growth is the income of the Chinese and the weakening of the US dollar.

    2. In the past, China has primarily imported intermediate goods from the US. As incomes rise, China will consume more finished goods and services from US.

    3. The US can maintain a large current account deficit with China because the recession makes cheaper good from abroad more attractive and because the Chinese government keeps the RMB artificially low. Even though there has been an increase in exports, the increase in imports to the US has increased by just as much.

  3. Ambraon 11 Apr 2011 at 10:45 am

    1. China's rise in income lead to the growth over the last decade seen in the graph.

    2. China has imported intermediate goods like raw cotton, microchips, computer components and aricraft. As incomes rise, China will be able to afford and import more finished goods.

    3. The amount of imports outweighs the amount of exports so the deficit will only increase or remain the same.

  4. Samantha Raineron 11 Apr 2011 at 10:46 am

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The change in consumer incomes has in China led to the growth over the last decade because incomes have increased.

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    In the past, China primarily imported intermediate goods from the US, and as their incomes rise, the Chinese consume more finished goods and services from the US; such as microchips, computer components and aircrafts, as well as grain, chemicals and cars.

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    The US is able to maintain a current large account deficit with China because of the recession, goods are cheaper and those goods are more appealing to the Chinese. There may have been an increase in exports, but there has also been an equal increase of imports to the US.

  5. Nathalie Polion 11 Apr 2011 at 10:47 am

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    Rising incomes in China, due to their economic growth. As firms in china have grown, they now require capital goods from the US

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    Computer parts; as incomes rise, imports will increase.

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Because the amount of imports outweighs the growth in exports.

  6. Pilaron 11 Apr 2011 at 10:48 am

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The growing incomes of the Chinese middle class has led to more demand for U.S. imports in China. The increase in purchase of intermediate goods and final goods has increase U.S. exports to China.

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    China has primarily imported intermediate goods from the US in the past in order to produce with those intermediate goods final goods, like cars, computers, etc.

    As incomes in China rise, more imports from the U.S. will be finished goods like cars because of the growing incomes and so less intermediate goods might be imported but more finished goods.

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    This is due to the fact that imports are still higher than exports. Thus, the large account deficit in the U.S. still remains large.

  7. Simon B.on 11 Apr 2011 at 10:51 am

    1. The primary determinant that lead to the increase in the demanded of exports for the USA to China is a change in consumer income. The average Chinese consumer income increased which lead to the increase in the demand for foreign goods.

    2. China has imported unfinished goods, such as cotton or plastic, which were then used to produce a finished good, a t-shirt or toy. Since the average income rose in china, more goods were demanded, so the Chinese had to import more from America to meet the demands.

    3. The US can maintain a large current account deficit with China because of the recession in America. A recession forces prices down, making goods more attractive to foreign countries. Even if there has been an increase in exports from China, an equal increase of imports in the USA keeps the deficit at the same rate.

  8. Alice Lion 25 Sep 2011 at 9:14 am

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The increasing income in China is the primary determinant.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    China has primarily imported intermediate goods (such as microchips and computer components which for making exported computers) from the US.

    As incomes in China rise, the proportion of final goods to intermediate goods increases also. China will import more final goods (such as BMW and iPhone).

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Because while China’s imports from the US increase, the imported demand from China in the US grow too.

    Such both-side-increasing finally cause the US maintains a large trade deficit with China.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    The low value of the RMB makes Chinese goods maintain in a cheap price, so that the US companies will trend to import goods from China which exacerbate the imbalance of trade between China and the US (the US suffer a trade deficit with China).

    If allow greater flexibility in the RMB’s value, the increasing demand of Chinese goods will also raise the value of the RMB. This will decrease the demand of the Chinese goods and thus reduce the US trade deficit with China.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    That $250 billion ended up in China.

    China uses the money to improve its own civil living standard.

  9. Alex Wangon 25 Sep 2011 at 2:44 pm

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    Because China is enjoying a fast growth of its economy which brings a significant growth of wealth to China's society, the deposable income of households surges as well as demand for imported goods surges.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    Previously China imported intermediate goods to produce final goods and sold back to the US. Now China imports more final goods such as luxurious cars. (Seriously I doubt the word that Iphones are imported from the US to China because recent data shows that China is the largest Apple Products producer in the world with over 70% of all Iphones produced in the world comes from China).

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Partly due to RMB's artifically adjusted low price that China's goods maintain relatively low prices therefore US imports from China still outweigh its exports.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    The RMB's price is managed to be in relatively low then prices of China's goods remain unfairly low. In this case US consumers prefer the lower-priced Chinese goods.

    The flexibility of RMB would help neither of the two countries in the long run because with the total amount of trade between China and USA outweighing that of any other two countries, these two countries depend deeply on the other one's products, currencies and economy stability. So, a fixed exchange rate between US dollar and RMB that represents PPP well would help justifying either trade deficit or surplus. After all we cannot say for sure that trade surplus is better than trade deficit.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    Part of the money that China gains from the USA has used to buy and own US government bonds (at about 1.735 trillion dollars up to July 2011), these bonds runs US authorities. This money flows to the US and results in a financial account surplus that balances deficit in current account.

  10. Peter (HFI Group1)on 25 Sep 2011 at 3:42 pm

    Before I answer the questions, I will say that there is something interesting in the graph: In year 2009, the exports to China declined a little. In my opinion, this decrease was caused by the recession in 2008 and 2009. Due to the comparative low productivity in US at that time, it's reasonable to see the decline of exports.

    Questions Response:

    1. The income of Chinese determine the demand of exports. As the increase of income in China, the exports will increase.

    2. The Chinese were liable to purchase intermediate goods, such as the composition of iPone. Currently, Chinese will import more finished products and services, such as cars.

    3. Even though Chinese import a lot from US, the result of that, which is the increase of the employment in US, will also have more afford ability to purchase Chinese stuff.

    4. As the policy controlled by Chinese government made the RMB undervalue, the US people have more afford ability to buy Chinese products due to the low price. So the deficit of US will detorite. If the RMB is more flexible, the RMB will find its right position, which result in decline of the number of imports from China to US.

    5. The Chinese will get the 250 Billion. The China will use the US dollar, which came from the selling of Chinese exports to invest the US fund.

  11. karen leungon 26 Sep 2011 at 9:42 am

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    Ans: It is Chinese income. When Chinese income rises, they have more money to purchase goods from US. In the past, China is poor so that they need some the basic things like agriculture. When the income rises, they desire for high-class goods like computers from US, cars from US, watches from US.

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    Ans: in the past, Chinese demand for intermediate goods and they go to manufacture then sell it again to get benefit from it. Now, they demand for final goods and services because as their income rise, they want to have better services and goods from US.

    .

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Ans: The US’s import exceeds its export. China government tries hard to keeps renminbi low so Chinese goods still attractive for US because it is cheap. Also, China has more people than US which mean that it has a large amount of labor force. It is one of the factors that make Chinese goods much cheaper than US. Although the export rise, it is offset by the enormous import.

    4. The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allow greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    Ans: When China government maintain a low value of Chinese currency, American’s demand to the Chinese good won’t decrease because of the low price so there still a imbalance of trade. If the RMB appreciate, Chinese goods will be more expensive for American so the US won’t imports so much from China.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    Ans: China may use the money to import from other countries or use it to stimulate the domestic economy.

  12. Koon Chakhatrakanon 28 May 2014 at 10:30 am

    I agree with your point that China could use the money to stimulate the domestic economy.

  13. Miwa Chanon 26 Sep 2011 at 10:03 am

    I just take up some of my oppinions instead of answering questions. It is a common topic for a long time. I think it isn't just related with China and America.

    As Chinese, we can feel that Chinese income is rising. I think China government and Chinese resident also Chinese businessman would like to enjoy the higher income. We can purchase more American goods when our income goes up. For a higher income, China always has large import to America, and American like to import the goods from China by virtue of the cheaper price. Chinese government is not pleased to appreciate the value of yuan for exporting more. If Chinese yuan appreciate, the demand of Chinese good would decrease I guess. On the other hand, I think China always export some disadvanced production like clothes or toys something like that. And also China just take charge of producing them but not designing them. I think that is a disadvantage of China because we pollute the enviroment and use many labor and nature resources, but we don't get as much income as some developed countries.

  14. Ammann #HFI#on 26 Sep 2011 at 10:09 am

    In my opinion, China suffered a least impact on stagnant recession of 2008 financial crisis, that's why China has a dramatic ascending trend in import from America(From 69.5 billions to 91.9 billions).

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    #The income of China is determinant of denmand for export, it means chinese people have more money than before so that they are willing to purchase more goos from foregin country.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    #China used to import intermediate goods from US for producing final goods, then resold to US to get benfits.However, as the amount of wage increase in China, Chinese people prefer to buy final goods from US but not intermediate goods, for instance electronic product.

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    #The gap between export and import still remain a massive difference. The increase in export to China due to the higher standard of life in America, and then American people will import more from China because they much richer than before.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    #The low value of China's aurrency cause the high attractive of RMB, because foreigner can afford good which made in China will a desirable price. So China's export will keep increasing. it will exacerbate the sitiuation of the deficit of US.

    On the one hand, if RMB is flexible, RMB's value will increase because of the huge demand of chinese goods. it cause diminish in US deficit.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance

    #The $250 billion will never end up because the trade between China and America will not have a thorough change with the short time period. China use money to buy American bond in order to enhance China authority in global market.

  15. David HFI Group 1on 26 Sep 2011 at 2:21 pm

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The demand in China has increased. Besides, Chinese incomes have also increased.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    Chinese may import refrigerators, watches, cars or foods from US in the past decade. But nowadays, Chinese will import computers, iphones, technology, planes or wheat.

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Yes, because American imports a lot of products and services from China, which are much bigger than exports to China. This situation will still maintain a few years.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allow greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    Yes, because if Chinese price is still very low and American will still want to buy china’s products and services so the lasting low value will make the imbalance bigger.

    No. If Chinese price is flexible so the price may increase or decrease. We can’t make sure that the price is proper so the flexible price may bring a worse influence or a better influence.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    The $250 billion will flow into China and Chinese may use this money to develop or buy other American’s products and services.

    They may use this money to build a new industry or buy stocks or bonds.

  16. Esane Guoon 26 Sep 2011 at 2:56 pm

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above is China’s fast growing economics clout, income rising and meanwhile the United States’ dollar depreciating.

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    In the past, China has imported intermediate goods from the United States, but as the income in China rise, China might as well import more of finished good and services form US, because with higher incomes, we are able to afford more.

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    It is because that the United State’s imports are still higher than the amount of exports. In this way, the United States current account stays as a large amount as it is.

    4. The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    As the Chinese government uses regulations and laws to maintain the value of RMB at a low rate by force, the citizen’s of United States would want to buy more products that are produced in China because they are cheap in price when you consider the exchanged rate. That would be imbalance of the trade between China and the US because the United States would need to import more from China and not as much is exported to China.

    5. If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    The $250 billion will end up in the China’s market and if China doesn’t spent the money on US good, it might be spend on investment in new company, capital, plants or importing good from other foreign countries other than the US.

  17. Sha Shaon 26 Sep 2011 at 3:21 pm

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    China’s demand for foreign goods is due to the fact that while his economic growth, not only the standard of living is higher the household income is also growing, which give the household more choice to consume.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    China used to imported intermediate goods, which are goods used as inputs in the production of other goods, such as partly finished goods, used in production of final goods. While china’s income rise, they are more willing than not to imports more finial goods, such as Iphone.

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    China’s import from USA makes their economic growth, and provides more choice for employee. But compared to USA, China has a low price which will enable American to choice Chinese goods. And since the standard of living in USA grows, they will consume more goofs, which cause the import from China is large.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    The RMB’s price is managed to be in relatively low then prices of China’s goods remain unfairly low. In this case US consumers prefer the lower-priced Chinese goods.

    RMB has a low price compare to dollars, which cause American wants to consume Chinese goods. So the deficits of US will decorate. If the RMB is more flexible, the increase in demand will care an increase In the price of RMB which will makes the demand goes down. But as Chinese government maintain the low value of RMB, the price will not goes up, so the demand will not go down. SO THE FLEXIBLE OF RMB WILL NOT HELP THE NATION!

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    The money is used to improve the standard of living in china and to buy bonds from US government

  18. angel chenon 26 Sep 2011 at 5:58 pm

    For me I think the main determinant is that the development of the China caused that phenomenon. The development of China increases the income, which increase the export from the U.S. to China.

    2. From the past, China had primarily imported the intermediate goods to produce the products and then sold to the foreign countries. With the increasing of the income, China will increase the import of the finished products. They will decrease the import of intermediate goods, since their wage had increased.

    3. since the speed of import from China is still larger than the rate of change of export to China. I mean that is possible for this situation

    4. The low exchange rate makes Chinese products more attractive, because the low exchange rate lets the U.S. use the same amount of the dollar to exchange more RMB which makes the Chinese products cheaper in some degree. So the U.S. people will import more goods from China, since the price is cheaper in china than the United States. The greater flexibility in the RMB’S value cause the exchange rate is higher than the “manmade rate “That will make the U.S people use the same amount of the dollar to exchange less RMB than before which makes the Chinese products not temptable as before. So the U.S will reduce the import from China. This can reduce the imbalance trade between the countries

    5. The Chinese use this amount of money to improve the quality of live, the method that products good and they may use this amount of money to develop the public system.

  19. Vincent Wengon 08 Oct 2011 at 2:08 pm

    1.What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    =====the primary determinant is the combination of a weakening American dollar and China’s growing economic clout. China grow very fast over the last decade, so China is more able and more willing to import goods from a weak-currency country– America

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    =====In the past, China primarily imported intermediate goods to produce goods and then sold to other country, however, as incomes in China rises, China would rather import some final goods such as Car, etc. than intermediate goods.

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    ====Although America exports a big number of goods to China,the US economy’s recovery has led to a boost in the demand for imports from China as well.It also imported a big number of goods from China, which offset the export, so the US current account deficit remains as large as it does.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    ==== When China maintain a low exchange rate against the US dollar, the RMB seems cheap, which is bad for the US's export,because the Chinese will think the US goods are so expensive.at the same time,it will improve Chinese export,because Chinese goods are cheaper. Finally, the imbalance exacerbate.

    However, when the RMB is flexible, the value of RMB will increase, so it will reduce the deficit in the US.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    ====the $250 billion will end up in China if China doesn't spend the money on US goods,and China will use this money to do some investment on US.

  20. […] “A glimmer of hope” – rising incomes in China lead to rising demand for US exports […]

  21. tanyadeolon 28 Nov 2012 at 7:57 am

    1) The article states that rising incomes in China led to the creation of demand for US exports because more people in the economy could afford to purchase them.

    2) China has primarily been importing goods such as microchips, computer components and aircrafts from US. China has been importing goods like these in order to manufacture finished goods that can be re-exported back to the US. However, as incomes continue to rise in China, perhaps the demand for other goods that are already finished will rise. An example of a good like this that is given in the article is the demand for BMW SUVs.

    3) One reason is because US imports much more from China than it exports to China, so the current account still remains in deficit. Another reason could be because of China’s artificially low exchange rate policy. The Chinese central bank and government have purposely kept it this way so that their exports appeal to foreign nations because they seem cheaper.

    4) As mentioned in the response to the previous question, the low exchange rate makes Chinese products more attractive, because the low exchange rate lets the U.S. use the same amount of the dollar to exchange more RMB which makes the Chinese products cheaper in some degree. So the U.S. people will import more goods from China, since the price is cheaper in china than the United States.

    5) China might use this to invest in US or maybe it uses the money to inject it in their own economy through government spending.

  22. tanyadeolon 28 Nov 2012 at 8:07 am

    Reply to # Esane Guo

    Hi! I really liked the way you explained your answers in detail. It was particularly interesting that you mentioned that the goods such as aircraft parts and microchips were intermediate good. Perhaps the fact that these goods eventually go back into the US market as finished goods is another reason for the American trade deficit.

  23. simcajkaon 29 Nov 2012 at 11:39 am

    1) What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    The primary determinant for the increase in demand was the increase in Chinese incomes, suggesting the increase in living standards and in the middle class.

    2) What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    In the past China have primary imported intermediate goods to employ in further production of their own goods. Now that income rises in China the composition of its imports from US is likely to shift towards higher amounts of finished, complete products such as automobiles.

    3) How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    Ironically, even thought the demand for imports from US in China has risen due to the higher incomes in China, the demand for imports from China into US has also risen because of its recent recovery. Other factors such as the fact that Chinese imports are still very attractive to abroad markets due to the artificially low currency the Chinese have imposed.

    4) The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    By maintaining a low value of Chinese currency, the Chinese imports in US are cheaper than domestic goods, therefore the demand for the imports maintain its high value, and leads to deficit in the US trade account. If the RMB was allowed to fluctuate on its own, it could possibly find a natural value that would normalize the level of imports from China, and help to reduce the deficit in US.

    5) If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    The $250 billion will end up in the Chinese market. China can use this money to increase domestic production, increasing exports, or focusing on investment into capital and new industries. The financial account is a record of all country’s transactions associates with the changes in ownership and in foreign assets. It is divided into 4 main sub-accounts: direct investment, portfolio investment, other investment and reserve assets, all showing the flow of money in and out of the country.

  24. simcajkaon 29 Nov 2012 at 11:43 am

    Reply to #tanyadeol

    Hey, I like your response, it’s very clear and concise and you get your point across easily, showing your understand. Good use of examples, especially in question two with the mention of specific intermediate godos and then the cars.

  25. nvirani2on 30 Nov 2012 at 3:34 am

    •What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    The primary determinant of demand for exports that has lead to the growth over the loast decase seen in the graph above is from the change in consumer income in China.

    •What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    As incomes in China rise, China will be importing more luxury goods from the US rather than the raw materials they were importing before. This is because the Chinese will have more money to spend rather than just importing what they need. This was seen in the article when it said that China was importing cars from California.

    •How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    Because of the increase in Chinese incomes, there is more spending from the Chinese on US imports. This thus raises the income in the US as well which increases the spending from the US to China. They will thus still have a large trade deficit.

    •The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    Products from China are cheap when there is a low value of the Chinese currency. This creates high demand for Chinese products, particularly from the US. This creates a clear inbalance as the US will be in trade deficit because of China while China will most probably have a trade surplus. Greater flexibility of the Chinese currency will allow for a smaller gap between the balance of payments in the US and China.

    •If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    The money that the US spent in 2010 ended up in China. China distributes that money to increase the income of the people in China. In addition, the money will be used in government spending to make the standard of living in China greater.

  26. lzhang2on 30 Nov 2012 at 4:07 am

    What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    The primary determinant of demand for exports from the U.S. is the economic situation in other markets, in this case, the income of the Chinese. As the economy of China grows stronger and people’s income rises, they demand more imported goods, such as iPhones and computers from the U.S.

    What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    Before, what China imports is used to make goods that are then reexported, like the Apple iPhone.
    China is purchasing more luxury goods such as microchips, computer components and aircraft, as these goods symbolize a state of development in the country and as people’s lives improve, they want more high-end goods. Exports of crops also increase because China is short of water and the land is not really arable. The variety of exported goods widens.

    How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    Although the export grows, the import from China grows as well as the US economy recovers and people have more money to spend, the demand for imports hence increases.

    The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    The low exchange rate from RMB to US dollar makes the Chinese goods cheap in the US market, hence the demand for the Chinese goods is very high, which leads to a high import of Chinese good to the US. The US good is made more expensive in the Chinese market and therefore less competitive because it is less affordable. The balance of payment will worsen for the United States. Allowing greater flexibility in the RMB’s value ensure that the US goods are not so expensive in the Chinese market and the Chinese goods are not so cheap in the US market, the balance between imports and exports is more achievable.

    If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    The $250 billion will end up be the positive income in China’s current account.
    China can use the money internally, such as improving the infrastructure. It can also invest in foreign market, such as buying the US bonds, further pushes the US dollar upwards.
    Financial account records an economy’s transaction in external financial assets and liabilities. The sum of a nation’s current account balance and the financial account balance equals zero.

  27. lzhang2on 30 Nov 2012 at 4:13 am

    Comment on simcajka’s “The $250 billion will end up in the Chinese market. China can use this money to increase domestic production, increasing exports, or focusing on investment into capital and new industries. The financial account is a record of all country’s transactions associates with the changes in ownership and in foreign assets. It is divided into 4 main sub-accounts: direct investment, portfolio investment, other investment and reserve assets, all showing the flow of money in and out of the country.”
    There’re a lot of benefits when a country has positive current account value because the money can inspire the government to do a lot of things to make the country better. I like how you have pointed out the various benefits which reveals to me that it is important for a country to improve its balance of payments.

  28. katieedwardson 02 Dec 2012 at 11:39 pm

    1. What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?

    The increase in exports to China indicates an increase in demand from Chinese consumers for US products. This is due to the weakening American dollar, and the increased incomes in China creating more consumer spending money.

    2. What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    Typically, China imported goods used to manufacture other goods that will eventually be shipped back to the US for sale. With the increase in incomes, China imports these materials but keeps more of the finished products than before. The domestic market is stronger now.

    3. How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    Even though the current account deficit should be decreasing because the number of exports is increasing towards balance, the US is still importing a lot from China. This results in a lack of progression toward balance of imports and exports because both quantities are increasing, maintaining the imbalance.

    4. The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    The low exchange rate ensures that demand for Chinese goods and services will not decrease in the US. This is why the imports have not decreased for the US, and a deficit is maintained – there is no decrease in demand for Chinese products and thus the level of imports and exports remain imbalanced.

    5. If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    The financial account consists of government assets and private assets, held locally or internationally. This contributes with the capital and current account to a nation’s balance of payments. The $250 billion in China’s possession can be used to invest in US assets, and therefore flow into the US increasing the demand for Chinese imports. That forms a deficit, and the flow of the $250 billion disrupts the US balance of payments.

  29. katieedwardson 02 Dec 2012 at 11:42 pm

    @Vincent Weng

    We had many similar ideas in our responses, most notable where the 250 billion goes. I too mentioned that it will be spent on investments in the US – causing the imbalance – and then it will be distributed in China to an extent as well.

  30. mmecathumon 04 Dec 2012 at 3:00 pm

    • What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    The primary determinant of demand for exports that led to the growth over the last decade seen in the graph above is the increase in the Chinese income.

    • What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    The types of goods China primarily used to import was known as intermediate goods. However, with the increase in income, demand will now shift to more finished goods.

    • How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    It is, in fact, possible for the US current account deficit to remain as large as it does when the level of imports into the country is still higher than the level of exports regardless of the growth in exports to China.

    • The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    By maintaining a low exchange rate against the US dollar, goods in China are more attractive to the citizens of US as they are cheaper. Therefore, more goods are demanded from China that results in the imbalance in trade.
    With an increase in the flexibility of the RMB, US will be more able to control and reduce deficit as now the level of imports will shift to a more “normal” amount.

    • If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, the $250 billion would end up in the Chinese market. As such, China could use this money to spend on public goods to improve the lives of their citizens among other actions. The financial account is a country’s total transaction record regarding changes in ownership and foreign assets illustrating the country’s flow of money

  31. mmecathumon 04 Dec 2012 at 3:11 pm

    @simcajka

    Hi there! I especially liked your response to question 5 when you stated how China can use the extra money to increase domestic production which leads to an increase in exports, or focus on investment into capital and new industries which my response lacked. Overall, a great response and really easy to understand.

    mmecathum

  32. dnyanon 04 Dec 2012 at 9:52 pm

    1.What is the primary determinant of demand for exports that has led to the growth over the last decade seen in the graph above?

    The rising incomes in China’s middle class have led to an increase in demand for exports from the US as consumers have a greater amount of disposable income to spend.

    2.What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?

    In the past China primarily imported intermediate and unfinished products like cotton, chemicals and microchips and these were then processed and resold. As incomes rise the composition of imports in China will change to finished products as people have a higher income to spend on luxuries like cars, phones etc.

    3.How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?

    This is because much as there was an increase in exports which should helps reduce the deficit there was also a rise in the amount spent on imports and therefore the US still has a large deficit on the current account.

    4.The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?

    With China’s currency maintained at a low exchange rate against the US dollar, Chinese exporters have an unfair advantage as their goods are much cheaper than if the currency was floating freely. Since these goods are relatively cheap the demand for them from US consumers is high. This result in a surplus for the balance of trade in goods for China as the sell a great amount of their exports to countries like the US, the US however is importing a lot from China as these goods are cheap and internationally competitive resulting in a deficit for them.
    With the RMB being given greater flexibility this will help reduce the large imbalance of trade between the US and China. The Chinese RMB would appreciate as there is a great demand for exports from China, and this would increase the price of Chinese exports making them less internationally competitive. This would decrease China’s revenue from exports decreasing their surplus. With Chinese goods being more expensive demand for their imports will decrease, additionally there may be an increase in the revenue from US exports as these are now relatively cheaper for Chinese consumers hence reducing the deficit in the balance of trade of goods in the US.

    5.If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.

    China then uses some of the revenue to buy US dollars and sell their Yuan, this increases the demand for the US dollar and supply of the RMB, resulting in a depreciation of the RMB keeping exported goods internationally competitive. Additionally China buys government bonds and I read that since 2011 no longer needs to go through primary dealers like other central banks and has direct access to the auction system and thus preserves the value of specific information about its bidding habits.
    The financial account refers to inflows minus the outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets. The relationship between the current account and the financial account is that when a country has a current account deficit then a financial account surplus is needed, which has the foreign exchange to pay for the excess imports. When a country has a current account surplus then it has received a lot of foreign exchange, which it can use to buy assets abroad, and thus results in deficit in the financial account.

  33. dnyanon 04 Dec 2012 at 10:03 pm

    @nvirani2
    You make some really good points, for the last question you could have however defined what a financial account is namely that it refers to inflows minus the outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets.

  34. zhou sophieon 07 Dec 2012 at 3:51 am

    • What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    In the last decade, the economy in China is increasing with double digit economic growth. As national of china increases, the demand for imports increases therefore demand for goods and services from U.S increases.
    • What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    Primary goods such as cotton, grain and microchips were imported from the US in the past. As income in China rise, luxury goods such as aircraft, cars were also imported.
    • How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    The current account of US would be the same if import increases as well as export. If residents of china invest more in U.S export industry the growth in exports of U.S might give higher income flows to china in the form of interest, profit and dividend.
    • The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    The artificially lowered exchange rate will increase net export of China which creates trade surplus for China. The trade surplus of China is a trade deficit for U.S economy. If the Chinese central bank does not closely manage the exchange rate, the net export of China will decrease due to appreciation of RMB.
    • If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    These $250 billion ended up as increase in reserve asset for the central bank of China. The money the US spends on Chinese goods will increase China’s export to U.S, creating a money inflow to BOP of China. Financial account includes the net changes in foreign ownership of domestic financial assets. If a nation’s current account’s balance is negative, then financial account balance should be positive. Therefore, the sum of current account and financial account should always be zero, in other words, balanced.

  35. cbowieon 22 May 2014 at 4:57 am

    1.It seems the main determinant of demand for these exports was the increase in income for the Chinese people that allowed for more spending on imports.
    2.China’s imports were previously made up of goods to be used as factors of production, although this income increase should suggest more final goods being purchased.
    3.This seems largely due to the fact that these exports do not outweigh US imports.
    4.By keeping currency low, China can encourage exports. If the currency was more flexible, it should rise, encouraging less exports and thus helping to correct the US balance of Payments.
    5.That money may have been invested back into the domestic market or into buying exports from other countries.

  36. Koon Chakhatrakanon 28 May 2014 at 10:27 am

    1) What is the primary determinant of demand for exports that has lead to the growth over the last decade seen in the graph above?
    As per the graph above, the determiant of demand for export leads to the growth in the last decade in China. This also increase the income of Chinese people, thus they have more money available to purchase goods from other countries.

    2) What types of goods has China primarily imported from the US in the past? As incomes in China rise, how will the composition of its imports from the US likely change?
    China import goods that they can re-manufacture then resell it again to gain benefit from it. Since their income rise, the demand for final goods increases as they want to be able to use products from the US.

    3) How is it possible that the US current account deficit remains as large as it does (as much as $250 billion) despite the growth in exports to China?
    In the US, import is higher than export, causing the deficit. China also have much larger population, thus its export will always be large.

    4) The value of China’s currency, the RMB, is closely managed by the Chinese Central Bank to maintain a low exchange rate against the US dollar. How does maintaining a low value of its currency exacerbate the imbalance of trade between China and the US? How would allowing greater flexibility in the RMB’s value help reduce the large imbalance of trade between the two countries?
    The low exchange rates makes Chinese products more attractive to the US suppliers, because they are cheap. The low exchange rates allow US residents to purchase low cost goods from China, thus increase China's export rates.RMB has a low price comparing it to USD, therefore causing China's goods to be more attractive to Americans.

    5) If the US spent $250 billion more on Chinese goods than China did on US goods in 2010, where did that $250 billion end up? What does China do with the money the US spends on its goods that it does not spend on US goods? Define the financial account and explain the relationship between a nation’s current account balance and its financial account balance.
    The $250 billion will end up in China, provide that China doesn't spend it on US goods. They can use the mon
    ey for various things such as invest in a new company or import other goods from other countries.

  37. studer solar power inverter stand alone systems prices

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  38. 1on 21 Aug 2016 at 5:14 am

    1

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  39. Golfon 21 Aug 2016 at 3:11 pm

    Golf

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  40. ????? ?? ???????? ????? ???????????? ???on 21 Aug 2016 at 10:38 pm

    ????? ?? ???????? ????? ???????????? ???

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  41. Volkswagen Polo 1.0 110hp ?? 13.940€on 23 Aug 2016 at 7:46 am

    Volkswagen Polo 1.0 110hp ?? 13.940€

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  42. VW Golf TDI DSGon 31 Aug 2016 at 2:31 am

    VW Golf TDI DSG

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English

  43. ???????? ??????????? ALPHAon 05 Sep 2016 at 3:36 am

    ???????? ??????????? ALPHA

    “A glimmer of hope” – rising incomes in China lead to rising demand for US exports | Economics in Plain English