4.1 - Terms of Trade Flashcards
How are terms of trade calculated?
Index Export Prices/Index Import Prices x 100
What do terms of trade show?
Quantity imports purchased per unit exports sold
When are terms of trade said to be improving or worsening?
Improving - >100
Worsening - <100
How do export prices effect the terms of trade?
Expensive imports, terms of trade improve
How do import prices affect terms of trade?
Imports expensive, terms of trade worsen
What does it mean for terms of trade to worsen?
Less imports purchased per unit exports
Which factors influence the terms of trade?
Global commodity prices (Oil,Gas)
Exchange Rate
Import tariffs/protectionism
What are the 3 main factors affected by a change in the terms of trade?
Standards of living
Technology import prices
BoP
How does a change in the terms of trade affect living standards?
Influences import prices
Strong ToT, cheap imports
Increases real consumer income
How does a change in the terms of trade affect technology imports?
Affects relative prices of capital imports
Improved ToT, cheaper capital
More investment
How does a change in the terms of trade affect the BoP?
Improved ToT tend to improve BoP
Imports + exports both rise
What does an improvement in the terms of trade mean?
Export prices rising relative to import prices
More imports purchased with less exports sold
How does the ER affect terms of trade?
Strong currency - Imports cheap
Improves terms of trade
