3- Terms Of Trade

Question 1

Terms of trade definition

Answer 1

Measures the price of a country’s exports relative to the price of their imports.

Question 2

Terms of trade calculation

Answer 2

(Index of export prices / index of import prices) x100

Question 3

Factors influencing a country’s terms of trade?

Answer 3

• Higher living standards- the country can import more for a given quantity of exports
• Deterioration of the current account of the balance of payments - although the terms of trade is referred to as an improvement because of its implications for living standard such an increase would cause a decline in the competitiveness of its goods and services.
• Devaluation of currency- who make imports more expensive and exports cheaper- deteriorating terms of trade
• Productivity- lower costs of production feeding through to lower export prices therefore leading to a deterioration of terms of trade