Question

Iron ore is Australia's largest export. Suppose that there was an unexpected increase in demand for Australia's iron ore exports globally. Explain what this would do to Australian Dollar exchange rates, and how this would impact other exporting industries, other import-competing industries, and domestic consumers.

Answer 1

Usually,exchange rates get effected by demand and cost of goods and services.If demand increases,cost of good decreases and if demand decreases then cost increases.So,here in the question it is given that there was an unexpected increase in demand for iron ore.It is clear that demand for iron ore has decreased the cost of iron ore.Since,iron ore is the largest export of Australia,the cost of iron ore effects the exchange rate.The Australian Dollar exchange rate decreases if cost of its main export is low.If exchange rate decreases,then import industries,export industries and even domesti consumers are effected.There would be a negative impat on exporting industries as low cost of iron ore effects the cost of other goods too.So cost of export goods decreases and low exchange rate causes loss to the manufacturers.There will be no profits for exporters if cost of goods and exchange rate is low.Value of currency decreases ,if exchange rate declines and causing negative impact on export industries.Import-competing industries would be benefited since there is low exchange rate and cost of those import goods is high.In this case,if imports goods aren't subsititutable with other domestic goods then imports tend to to be same and expenditure of country increases.By this,import-competing industries will be in profits if the exporting country has low exchange rates since the cost of import goods will turn to be relatively higher.Here,the country has negative impact and import industries gain profits if exchange rate is low.Domestic consumers will be able to consume more goods since cost of other goods an even exchange rate will be  low.Demand and sales of local goods increases with decline in cost of goods and exchange rate.Hence,in this way,higher demand for iron ore effects the exchange rates,cost of the remaining goods,import industries,export industries and domestic consumers.