4.1.4 - Terms of trade Flashcards
What’s terms of trade?
The purchasing power of a country’s exports.
How do you calculate index numbers?
New number
—————— X100
Old Number
What will ALWAYS be the value of the base index number?
100
How doy yo calculate terms of trade
Price of exports
———————- X100
Price of imports
What can terms on trade an indicator of?
A country’s macroeconomic performance.
Name 2 factors which can affect terms of trade
- Tarrifs
- Substitutes
- Economic development
- Shifts in supply and demand
- Reciprocal demand elasticity
- Devaluation
- Exchange rate
- Inflation rate
What’s a tariff?
A tax on goods being imported.
What’s a substitute?
A good that can be purchased in replacement of another.
How would a shift in demand affect terms of trade?
If a good is more popular, the demand will rise. Price of that good will be more to cope with demand so countries will pay more for that good.
This means value of imports will
What’s reciprocal demand elasticity?
Refers to the demand and supply elasticity for exported and imported goods of two trading countries.
How do tarrifs affect terms of trade?
China could increase tariffs on a certain good. This would make the good cost more to import. Therefore decreasing demand for that good as it’s less affordable thus decreasing China’s terms of trade.
What’s the Prebisch-Singer hypothesis?
A long-run decline of a country’s terms of trade is due to countries that depend on a primary product’s production.
Therefore break away from dependence of that good and diversify the economy.
What country depends highly on copper and lithium?
Chile. They have 50% of the Earth’s lithium and 30% of the world’s copper.
What’s the balance of payments?
The balance of payments for a country summarises all transactions between residents of a nation and non-residents during a period. It includes the value of trade flows, investment incomes and other financial transactions across national borders.
