4.1.3-4 Patterns of Trade and Terms of Trade

Question 1

What causes a country’s pattern of trade to change?

Answer 1

• Over time, country’s FoP can change (e.g. ageing population = smaller workforce, ↑investment = ↑capital stock etc.)
• = opportunity costs for producing different goods and services will change
• = comparative advantage changes = shift in demand for exports (demand will ↑ for most competitive industries) = pattern of trade changes

e.g. UK steel industry –> financial services

Question 2

Emerging economy?

Answer 2

• One that is progressing toward becoming more advanced usually with rapid growth and industrialisation

Causes both pattern of trade and size of trade flows to change

Question 3

Terms of Trade?

Answer 3

• Index that tracks relative price of country’s exports compared to its imports

Price of exports / Price of imports

Question 4

Deterioration vs improvement in ToT?

Answer 4

• Deterioration: when ToT gets smaller
• Improvement: when ToT gets bigger

Question 5

Short-run causes of changes in ToT?

Answer 5

• Changes in supply and demand for exports and imports
• Changes in inflation rates
• Changes in exchange rates

Question 6

Long-run causes of changes in ToT?

Answer 6

• Changes in incomes
• Changes in productivity

Question 7

How can both a deterioration and improvement in ToT lead to higher living standards?

Answer 7

• If exports price elastic, deterioration in ToT = ↑demand for exports = ↑export revenue = improvement in current account on BoP
• If exports price inelastic, improvement in ToT = ↑export revenue = improvement in current account on BoP