Chapter 5

Question 1

Definition of TOT?

Answer 1

Measures the relative change in unit prices of exports, imports
Influences BOP, GDP (GDI), income, exchange rates, investment and also - a country’s standard of living
Considered a weighted average

Question 2

Formula?

Answer 2

Export price index (XPI) / Import price index (MPI) x 100.

Question 3

The value of the number?

Answer 3

Relatively unimportant, it’s the movement that’s considered important
Rise - favourable movement,
Fall - unfavourable movement

Question 4

Scenarios, TOT

Answer 4

If export/import price index increase equally - no change to TOT

If import price increases, export stays relatively similar - deterioration in the terms of trade

If export price increases, import stays relatively similar - improvement in the terms of trade

Question 5

Favourable movement?

Answer 5

Export prices rising relative to import, we can purchase more imports for a given quantity of exports
Increased welfare
Effects include: an increase in trade balance, aggregate demand, national income, living standards and inflation (CPI).

Question 6

Unfavourable movement?

Answer 6

Import prices rising relative to export, we can purchase less imports for a given quantity of exports
Reduced welfare
Effects include: a decrease in trade balance, aggregate demand, national income, living standards and inflation (CPI).

Question 7

Australia’s composition of trade

Answer 7

• little influence on their exported good prices - set by world demand/market.
• Australia: minerals, oils, gas and iron ore.
• imports: intermediate and manufactured goods.

Question 8

Trends in the TOT

Answer 8

2004-2012, general increase
Decrease in 2009 GFS
2011 rose to the highest its ever reached in 140 years - since it was floated.
2012 - went from 120 to around 80 in 2016.

Question 9

Effects of changes in ToT: business cycle

Answer 9

If there is an increase in the terms of trade, the business cycle will turn to the expanding phase before possibly reaching a peak.

Result - increased employment and production/efficiency.

Question 10

Effects of changes in ToT: Current account balance

Answer 10

If there is an increase in the ToT, there is an expansion in net income, goods and services.

Question 11

Effects of changes in ToT: exchange rate

Answer 11

Strong terms of trade = lead to an appreciation in the terms of trade.
Disadvantage for domestic producers because they can’t keep up with the international competitiveness.

Question 12

Effects of changes in ToT: national income

Answer 12

If our terms of trade increases, we have more money as a nation - we have more to sell etc… helping with our current account balance.