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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 ?

Ans: I think the demand for Australian dollar shifts to the right this increase in dollar demand will cause the exports to go down as imports become cheaper in Aud terms

Is my ans correct or requires any changes ?

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  • $\begingroup$ You might benefit from reading about Dutch disease. $\endgroup$
    – Giskard
    Commented Nov 17, 2022 at 9:14

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If there has been an unexpected increase in demand for Australia's iron ore exports globally, the first thing to notice or realize is that, as a general rule, the importing agent must pay for the purchase of the goods in the currency of the exporter; that is, he must acquire this currency, in exchange for the currency of his country or market. As people outside of Australia purchase their currency, we have more demand for Australian currency, so high demand for a currency or a short supply of it will cause the price to rise. The supply and demand for a currency is tied to a number of interlocking factors including the country's monetary policy, the rate of inflation, and political and economic conditions.

So, since there is a price increase in the Australian currency, iron buyers will again have to see which country/industry maximizes their profits (and this is where it affects other industries as there is a price change, these profits or just continue as before.)

It should be noted that, after all, the most affected are Australian companies, since they lose buyers or stay as before, compared to other non-Australian companies that gain buyers or stay the same.

Domestic consumers will be affected by the central bank's response as they have to adjust the minimum wage, among others, due to their currency changes.

Your idea was on the right track, I hope it helps you and I'll be attentive to comments.

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  • $\begingroup$ I agree with what you've said. Would you also agree that given in the real world speculative flows of capital dwarf trade-based currency movements and therefore what happens to the demand for a product might be completely irrelevant to the strength of the currency? $\endgroup$
    – Studi
    Commented Nov 17, 2022 at 7:36
  • $\begingroup$ Bear in mind that the buy and sell volumes for Australian dollars (and all floating currencies) which ultimately determine the precise exchange rate are dominated by transactions in financial assets as opposed to real trade volumes. Financial flows are over 10 times and up to potentially 100 times as large as physical flows in goods and services, including commodities such as iron ore. $\endgroup$ Commented Dec 11, 2023 at 9:44

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