4.1.4 Terms of trade Flashcards
- Calculation of terms of trade - Factors influencing a country's terms of trade - Impact of changes in a country's terms of trade
How do you calculate terms of trade?
Terms of trade = (Index of export prices / Index of import prices) x 100
Terms of trade
Terms of trade is the rate at which exports exchange for imports.
Why do relative inflation rates influence a country’s terms of trade?
Higher UK inflation relative to others raises export prices, meaning there is a higher TT.
Why do raw material prices influence a country’s terms of trade?
If developed countries which import raw material face increased raw material prices, meaning there is a lower TT.
Why do exchange rates influence a country’s terms of trade?
Higher exchange rates relative to others make exports pricier, meaning there is a higher TT.
Why do tariffs influence a country’s terms of trade?
If country imposes taxes then the price of imports increases, meaning there is a lower TT.
Why does relative productivity influence a country’s terms of trade?
High relative productivity makes exports cheaper, meaning there is a lower TT.
What is the terms of trade ratio?
Ratio of export prices to import prices.
How do you know if there has been an improvement or a worsening in the terms of trade?
Any figure above 100 indicates an improvement.
Any figure below 100 indicates a worsening.
Improvement
More imports can be purchased for a given amount of exports.
Deterioraton
Fewer imports can be bought for a given amount of exports.
What is the impact of higher TT on living standards?
Higher TT means that there has been an improvement so there are more g/s which increases living standards.
What is the impact of higher TT on the current account?
If more imports can be purchased for given exports then current account decreases (deficit) which decreases competitiveness.
What is the impact of lower TT on inflation?
Lower TT means fewer imports can be bought for a given amount of exports so inflation decreases (lower domestic inflation). Could get increased imported inflation.
What is the resource curse?
Resource rich developing countries exchange rates are fuelled upwards by demand for their resources. This increases their TT ( the price of exports goes up). As a result, they take a hit on their current account.
