4.1.4 Terms of trade

Question 1

how do you calculate the terms of trade?

Answer 1

Terms of Trade (ToT) index = (price index for exports) / (price index for imports) x 100
- if it increases it means the countries exports can now buy more imports (value of exports has increased or imports has decreased)

Question 2

factors influencing terms of trade?

Answer 2

• global prices for raw materials and components
• the exchange rate
• trade barriers, import tariffs and quotas
• inflation rates
• changing supply and demand for imports
• changing factor endowments