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Theme 4 > 4.1.4 Terms Of Trade > Flashcards

4.1.4 Terms Of Trade Flashcards

1
Q

Define terms of trade

A

Measures the relative price of exports to imports in an economy

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2
Q

Terms of trade formula

A

Index of export prices/index of import prices x 100

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3
Q

What is the difference between terms of trade and balance of trade?

A
  • Terms of trade: price
  • Balance of trade: difference between the total value of exports compared to the total value of imports
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4
Q

What is an improving terms of trade?

A

When the price of exports sold overseas increases relative to imports

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5
Q

What is a deteriorating terms of trade?

A

When the price of exports decreases relative to imports

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6
Q

Reasons that causes terms of trade to improve

A
  • specialisation in higher value exports
  • world real income levels change in favour of this country’s exports
  • exchange rate appreciates causing import prices to fall
  • fall in the world price of imported tech
  • reduced protectionism
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7
Q

How does specialisation cause terms of trade to improve?

A
  • a country might switch their production & investment to higher value export
  • adding value locally/move up the value chain
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8
Q

How might world real income levels causes terms of trade to improve?

A
  • rising global incomes (income elastic) so the world economy wants more of the things you’re producing
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9
Q

How might exchange rate cause the terms of trade to improve?

A

Exchange rate has gone up = cost of imports to go down

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10
Q

How might a fall in world price of imported tech cause terms of trade to improve?

A

Imported tech price decrease = decrease cost

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11
Q

How might reduced protectionism cause terms of trade to improve?

A

Trade deals with a country which lowers import tariffs or increase import quotas

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12
Q

Reasons that causes terms of trade to worsen

A
  • greater global competition
  • tech advances
  • global economy downturn/recession
  • exchange rate depreciation
  • imposition of tariffs
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13
Q

How might greater global competition cause the terms of trade to worsen?

A

Increase in countries producing same good which decrease the world price of exports

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14
Q

How might tech advances cause terms of trade to worsen?

A

Reduces the cost of production so price of exports decrease

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15
Q

How might global economy recession cause terms of trade to worsen?

A

World income levels change to the detriment of this country’s exports = decreased demand = decreased exports

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16
Q

How might exchange rate depreciation cause terms of trade to worsen?

A

This increases the price of country’s imports

17
Q

How might imposition of tariffs cause terms of trade to worsen ?

A

Increase the price of imports e.g essential raw materials

18
Q

What is an implication of a fall in the terms of trade

A

Fall in the terms of trade means a country must export more g/s maintain the same level of imports

19
Q

Evaluation of an implication of a fall in the terms of trade

A

If caused by a depreciation in exchange rate = improvement in price competitiveness of export = more jobs =more output

20
Q

Implication of a fall in the terms of trade (evaluation of evaluation)

A

But if caused by a fall in a country’s export prices, this could lead to a worsening trade balance & lower tax revenue

21
Q

Implication of a fall in the terms of trade (example 1)

A
  • UK has a stable terms of trade since 2000-8
  • However AUS improved during 2009,-10 due to increased high world price of coal & iron ore (key exports)
  • also AUS dollar were really expensive = decreased import prices
22
Q

Implication of a fall in the terms of trade (example 2)

A

Zambia has volatile terms of trade since they’re a big exporter of copper which has a volatile world price
- evaluation: consider elasticities, inflation and productivity

23
Q

What is a good reason to improve terms of trade?

A

If PED for X is price inelastic (average prices up = increased revenue)

24
Q

Why might a country not want to improve their terms of trade?

A
  • domestic inflation drives up domestic prices relative to import prices
  • if PED for X is price elastic (price decrease = revenue decreases)
25
Q

Benefits of a deterioration in the terms of trade

A
  • greater productivity & efficiency of domestic production
  • import price level rise but the PED for M is price elastic (overall spending on imports falls)
  • price level (inflation) is rising faster in competitor countries
26
Q

Good reasons for a deterioration in the terms of trade (greater productivity & efficiency)

A
  • greater productivity & efficiency of domestic production = lower export prices while maintaining profit margins (greater global competitiveness)
27
Q

Why might an increasing terms of trade be good?

A

Increased living standards since less has to be exported to buy a given quantity of imports

28
Q

Why might an increasing terms of trade be bad?

A

It could mean that the country’ g/s are less competitive & so result in a deterioration in current account, lower output & high unemployment

29
Q

Is terms of trade increasing good (conclusion)?

A

The more diversified the economy, the less volatile the terms of trade

30
Q

Why might an increasing terms of trade be good? (evaluation)

A
  • The Marshall Lerner condition
  • = the lower the prices of exports in total money terms rise > than the neg impact of the higher priced imports (Export boost > import negative)
31
Q

What is the impact of depreciation on macroeconomic objectives?

A
  • current account trade balance
  • sustained GDP growth
32
Q

How can a depreciation lead to sustained GDP growth?

A
  • a depreciation = economy open to international trade & investment = increase AD
  • e.g UK 2016, the fall in sterling helped avoid the full-blow on recession
  • it can act a shock absorber when a country experiences unexpected turbulence
33
Q

What happened when UK saw a depreciation

A
  • In the summer of 2016, the fall in sterling helped the UK to avoid the full-blown recession that some analysts had predicted.
  • Growth slowed but remained +ve and the weaker pound injected extra demand in industries e.g tourism & transport.
  • Manufacturing was assisted with a more competitive exchange rate although this sector accounts for only ten percent of total UK GDP.
34
Q

Evaluation of a depreciation leading to economic growth in the UK

A
  • there is no guarantee that exporting firms will take advantage of additional competitiveness
  • there is evidence that UK firms have instead opted to raise the price o exports = enjoy a higher profit margin
  • also imports = more expensive

Theme 4 (18 decks)

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