4.1.4 Terms Of Trade Flashcards
What is the terms of trade?
Relative price of exports to imports.
Measures the rate of exchange of one product for another when two countries trade.
(Quantity of exports that need to be sold in order to buy imports).
What is an improvement? What does the terms of trade assume from this?
Rise in export prices or decrease in import. That more imports will be bought w same level of exports.
What is a deterioration?
Price of exports decreases relative to imports.
Country needs to sell more exports to buy same amount of imports.
Real living can fall.
When is a deterioration bad? Spec for developing?
Prebosh singer hypothesis = LR prices of primary goods in comparison to manufactured will fall. (Bad for developing). Therefore will be fall in terms of trade.
- when price of exports call worsen trade balence + lower tax rev.
When is a deterioration good?
- improvement in productivity/tech = lower export prices but they are more competitive so high q will be bought thus higher rev.
- depreciation = increases competativenesss of exports.
What factors influence the terms of trade? (Change in prices of imports and exports).
- SR = inflation, exchange rates, D/S, trade deals
- LR = income, productivity, specialisation in higher value imports.
When is an improvement in tot good? Give example?
Only if revenue will increase will an improvement help the economy.
- D for exports increases (p + q will go up).
- High inflation but for inelastic goods (demand wont fall much).
When at is an improvement but is acc bad for economy?
High inflation but for elastic goods (as demand will fall) so less revenue.
How do you calculate the terms of trade?
Index that calculates the WEIGHTED average of thousands of diff exports + imports.
Av export price / av import price X 100
Not 100%%%
What are reasons why terms of trade might worsen?
- Depreciation.
- Increase in other exports of same good reduces price.
- tech advantages reduce costs.
- world incomes fall.
- imposition of tariffs (increases import prices).
Give example of bad improvement?
Australia = export coal (their international prices went up) + appreciation in dollar (p of imports went down).
Strong dollar caused slowdown in tourist industry + closure of less competitive industries.
Explain zambias ToT?
Highly volatile ToT.
Due to massive export or being copper which is world price volatile.
