4.1.4 Terms Of Trade

Question 1

How to calculate terms of trade

Answer 1

Index of average export price
——————————————— x 100
Index of average import price

Question 2

Define terms of trade

Answer 2

Ratio of export prices to import prices

Question 3

Define the law of comparative advantage

Answer 3

A theory that believes that countries should specialise in the production of goods and services they have a comparative advantage in to gain from trade

Question 4

Factors that affect terms of trade

Answer 4

1. Inflation rate (higher price level, lower competitiveness, lower export)
2. Productivity rates (more efficient, lower COP, more competitiveness, more export)
3. Exchange rate (lower pound valuation, more export)

Question 5

Impact of changes in a country’s term of trade

Answer 5

1. export revenue
2. GDP growth
3. Inflation
4. Employment
5. Multiplier effect
6. Tax revenue
7. Social consequences