The last two posts have looked at how a trade imbalance gets worked out in a freely floating exchange rate environment as explained by Sal Khan. Today's 10-minute video, "Currency Effect on Trade Review" brings it all together and shows how the quantity demanded for dolls and cola adjust, along with prices, to result in balanced trade.
This sets the stage for what is happening in the real world with China controlling its currency and the role of U.S. Treasuries, which will be taken up next.
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