4.1.4 - Terms of trade Flashcards
Terms of trade calculation
Define the term ‘Terms of trade’
The terms of trade measure the price of a country’s exports relative to the price of its imports.
How does terms of trade differ from balance of trade ?
What does an improvement of terms of trade mean ?
This means that one unit of exports buy more imports
What does a deterioration of terms of trade mean ?
One unit of exports can buy fewer imports.
This is bad because some countries e.g countries who are primary products dependent can’t afford as many capital imports.
What factors influence terms of trade ?
- Exchange rate (SR)
- Price of raw material (SR)
- tariffs (SR)
- Inflation rates (SR)
- Productivity (LR)
- Incomes are not a main factor though so only use it if you really need to
How does exchange rates affect terms of trade (a depreciation) ?
- Exchange rates is the price of one currency in terms of another.
How does exchange rates affect terms of trade (a appreciation) ?
How does Price of raw material terms of trade
Try and say deteriorates instead of worsens
How does tariffs affect terms of trade
How does productivity and technology impact a countries terms of trade ?
- Technology may help to improve productivity as well has finding cheaper and quicker production methods which will overall ⬇️ cost of production.
- ⬆️ productivity may ⬇️ costs of production.
- Lower costs allow firms to undercut foreign competitors, making their exports relatively cheaper and therefore more internationally competitive. This can ⬆️ demand for exports, improving the trade balance
- However this will also cause their price of exports ⬇️ 🟰deterioration in their terms of trade.
Eval : - This depends on if the firms use lower costs as a way of reducing their prices to make their goods more internationally competitive or instead if they choose to use lower costs as an opportunity to boost their profit margins.
How does incomes affect a countries terms of trade ?
What are the Impact of changes in a country’s terms of trade
- Living standards
- Competitiveness
- Any change of TOT will impact current account balance, GDP, unemployment, competitiveness, income, standard of living .
How is living standard an impact of changes in a countries terms of trade ?
How is competitiveness an impact of changes in a countries terms of trade ?
How does inflation rate affect a countries terms of trade ?
Remember to always consider the inflation rate in other countries.
- Eval : inflation rate doesn’t take into account initial starting price of exports. So even if inflation is higher in one country exports still may be cheaper in that country due to lower starting prices
Evaluation points for a deterioration in terms of trade is caused by an increase in income.
This is assuming export prices remain the same. Since incomes rise there would also be a rise in consumption in the economy this may lead to an increase in AD (diagram for that) and the this may lead to demand push inflation causing the prices for exports to also increase negating the effect of an increase in import prices which causes a deterioration in the terms of trade.
- If export prices increase in proportion to import prices, the ToT may remain unchanged.
- The net effect depends on how much export prices rise relative to import prices.
Summary ish
ALWAYS MENTION WHAT HAPPENS TO STANDARDS OF LIVING !!!!
Tip
- Anything that DIRECTLY affects the price of goods and services will affect export prices.
- e.g inflation, tariffs, exchange rates.
- The the price of this will then affect demand . Then do your chain of reasoning .
- Eval : Depends on how price inelastic the export is.
