Mar 06 2012

Planet Money Podcast – “China’s Giant Pool of Money”

NPR’s Planet Money team did a great podcast last week about China’s accumulation of US dollars from its large trade surplus with the United States. This story offers a great illustration of the theories I introduced in my recent video lesson, The Relationship between the Current Account Balance and Exchange Rates

Listen to the podcast, watch the video lesson, and respond to the discussion questions that follow.



Discussion Questions:

  1. Why does the Chinese Central Bank possess over $3 trillion of foreign exchange reserves?
  2. What does the Chinese Central Bank do with the vast majority of the money it earns from the sale of its exports that it does NOT spend on US goods? Why not keep this money in cash?
  3. Why does the Chinese Central Bank manage the value of its currency, the RMB? Why not let the exchange rate be determined by the free market?
  4. As the RMB is slowly strengthened against the dollar, who are the winners and losers? What impact should a stronger RMB have on the balance of trade between China and the US?

 


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

2 responses so far

2 Responses to “Planet Money Podcast – “China’s Giant Pool of Money””

  1. Geof. Kon 12 Mar 2012 at 10:11 am

    1- The Chinese Bank has all these dollars because of years of current account surplus because China exports much more to America then America exports to China.

    2- It does not keep the money in cash because first of all because of inflation all that cash would slowly lose its value but also this would cause the Chinese RMB to become stronger and the USD to become weaker and weaker as it supplies more and more dollars. This is bad because that means with a stronger RMB America will decrease its imports from China.
    China buys capital account in the USA by buying a lot of American government debt as well as just in general investing in the American financial market. Doing this allows the USD to appreciate in comparison to the RMB so that the purchasing power the Americans have doesn't go too low.

    3- If the value of the RMB was determined solely on free market the just current account deficit between the US and
    China would lead the RMB to be very strong (appreciate) and the USD to become extremely weak (depreciate). China doesn't want this because it would lead to the demand for Chinese goods to plummet reducing China's exports critically and therefore reducing GDP!

    4- A stronger RMB will lead to USA importing less (China exporting less) because the USD will depreciate and have less purchasing power in China. And China importing more from US (US exporting more) because it's RMB can now buy more USD. This will hurt Chinese in the short run because less exports means less GDP but in the long run they will stabilize to a point of equilibrium and so will America. America will be able to buy less from China at low prices so the wealth of the American people might go down but in the long run as imports decrease and exports increase the GDP of the country will go up and wealth will return.

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    Planet Money Podcast – “China’s Giant Pool of Money” | Economics in Plain English