4.1.4: Terms Of Trade

Question 1

What is the terms of trade?

Answer 1

The ratio between a country’s export prices and its import prices.

Question 2

Terms of trade above 100 are…

Answer 2

… improving.

Question 3

Terms of trade below 100 are…

Answer 3

… worsening.

Question 4

What is the equation for terms of trade?

Answer 4

Average Export Price Index / Average Import Price Index X 100

Question 5

What are factors that can improve terms of trade?

Answer 5

-Specialisation in higher value exports.
-Exchange rate appreciates, causing import prices to fall.
-Fall in price of imported technology.
-Less tariffs.

Question 6

What are factors that can worsen terms of trade?

Answer 6

-Other countries producing the same good.
-Exchange rate depreciates, causing import prices to rise.
-World income levels decrease.
-Imposition of tariffs.

Question 7

What are the impacts of improving terms of trade?

Answer 7

-Reduces the effects of cost-push inflation, since import prices are falling relative to export prices.
-Improves living standards.

Question 8

What are the impacts of worsening terms of trade?

Answer 8

-Makes the price of new technology more expensive, limiting productivity.
-Leads to a fall of living standards, as less imports are bought.