The Australian trade deficit during the 1980s was due largely to the rise in the Australian...

The Australian trade deficit during the 1980s was due largely to the rise in the Australian budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of Australian products relative to foreign products.

a). Assume that Australian products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate?

b). Use a three-panel diagram to show the effect of this shift in net exports on the Australian real exchange rate and trade balance.

c).Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of Australian products have any effect on our standard of living?

(Hint:When we sell our goods to foreigners, what do we receive in return?)

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Rahul Sunny answered 1 year ago

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