Australian net export spending falls when the:

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Let’s break down the question: Australian net export spending falls when the overall demand for Australian goods and services from abroad declines or when the price competitiveness of Australia worsens relative to other countries. We’ll evaluate each option in turn.
Option a: 'price level in Australia falls relative to the price level in other countries.' If Australia’s price level falls relative to others, its goods and services could become cheaper for foreign buyers, potentially increasing net exports, not causing them to fall. This would generally improve external demand for Australian goods, so this option is unlikely to explain a fall in net exports.
Option b: 'value of Australian dollar decreases relative to other currencies.' A weaker Australian dollar makes Australian goods cheaper for foreigners, which tends to boost exports and reduce imports, thereby increasing net exports, not decreasing them. Therefore, this option would not explain a fall in net exports.
Option c: 'economic growth rate of Australian GDP is more rapid than the growth rate of GDP in other countries.' If Australia’s economy grows faster than others, its income and demand for imports could rise more quickly, but more importantly, global buyers may face higher Australian prices or the relative growth could attract imports from Australia faster than Australia exports, depending on exchange rate and terms of trade dynamics. In standard open-economy analysis, a faster domestic growth rate relative to trading partners can coincide with a worsening net export position because domestic demand for imports rises and the foreign demand for exports may not keep up. This option plausibly explains a fall in net exports.
Option d: 'inflation rate is lower in Australia relative to other countries.' A lower inflation rate in Australia compared to others typically improves price competitiveness over time, potentially boosting exports and reducing imports, which would tend to raise net exports, not lower them. This would not explain a fall in net exports.
In summary, options a, b, and d describe scenarios that either improve or do not clearly worsen net exports, whereas option c describes a relative growth scenario that can lead to higher import demand and potentially a lower net export balance, making it the more plausible cause among the choices. The reasoning here aligns with the idea that faster domestic growth relative to peers can widen the trade balance deficit if import growth outpaces export growth, given domestic income effects and absorption.

MCD2090 Macroeconomics - Trimester 2 - 2025

Australian net export spending falls when the:

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