Question

When the price level in Australia rises relative to the price level of other countries, ceteris paribus, ________ will rise, ________ will fall, and ______ will fall.
A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports

Answer 1

o Exports (X) are goods produced in domestic country that are sold to other foreign countries.

o Imports (M) are goods produced in foreign country that are purchased by domestic consumers.

o Net Exports (NX) is the difference between a country’s exports and imports. Mathematically it can be written as:

NX = X – M

Using the given scenario in the question, when price level in Australia rises relative to the price level of other countries, ceteris paribus, Imports will rise, Exports will fall, and Net exports will fall.

Option A is Correct: Imports; Exports; Net Exports

A rise in price level in Australia means, domestically produced goods become relatively more expensive. So, Australian exports become less competitive that causes a fall demand of exports from the foreign countries. On the other hand, as foreign imports become relatively cheaper as compared to domestically produced Australian goods, demand for foreign imports rise. Hence, with a rise in imports and fall in exports leads to a fall in the overall net exports of Australia.

Option B, C and D are incorrect because in any of these cases the given sequence and the situation does not match at all.