macro a2

Question 1

what is terms of trade?

Answer 1

terms of trade refers to relative prices of a countries exports and imports. when the price of exports is said to be higher than imports then it is said that terms of trade is favourable

Question 2

what is the terms of trade calculation

Answer 2

terms of trade= (price of exports/ price of imports) x100

Question 3

what are the short run factors influencing terms of trade?

Answer 3

1. INFLATION RATE high inflation rates can lead to decreased exports demand ( bc higher prices) lower terms of trade
2. EXCHANGE RATES: fluctuations in the exchange rate can impact a countries export competitiveness and terms of trade. currency appreciation means price of exports is higher so better terms of trade
3. DEMAND FOR EXPORTS: if the demand for a countries exports rise improves their terms of trade

Question 4

example of how inflation impacted terms of trade

Answer 4

Covid 19 pandemic caused distruptions in global supply chains leading to shortages of goods and increased production costs

many countries particularly those heavily reliant on imports of essential goods experienced deterioration in their terms of trade.

The ukraine war strained supply chains and drove up prices for essential commodities like energy and food

Question 5

give an example of how exchange rate’s influenced terms of trade

Answer 5

the japanese yen appreciated significantly against major currencies during the 2019 covid pandemic japans relatively stable economic conditions contributed to its appreciation. appreciation in the yen made exports more expensive reduces the demand for japanese goods the volume of imports were cheaper this meant terms of trade worsened

Question 6

give an example of how increased demand for exports impact on terms of trade

Answer 6

chinas significant increase in demand for iron over the past two decades has led to a surge in the prices of australian iron ore exports. increased export prices have improved australias terms of trade allowing for more imports per unit exports

australias large iron ore reserves and proximity to china have made it a major supplier of iron to china

Question 7

what are long run factors influencing terms of trade allowing?

Answer 7

technology
rising incomes
productivity
elasticity

Question 8

explain how LR factor rising incomes affect terms of trade

Answer 8

as incomes rise the demand for imports often rise leading to a deterioration in the terms of trade. if a country experiences significant economic growth its citizens may start buying more luxury goods from abroad further increasing import prices relative to export prices.

Question 9

explain how LR factor improved technology affects terms of trade

Answer 9

improved technology means increased efficiency and productivity creating more goods and services faster more efficiently increasing export prices improving terms of trade allowing

Question 10

explain how the LR factor productivity affects terms of trade

Answer 10

improvement in productivity can reduce costs of producing a good making exports cheaper and more internationally competitive. this worsens the terms of trade because they may need to export more to afford same amount of imports

Question 11

explain how the LR factor elasticity affects terms of trade

Answer 11

elastic goods country’s exporting elastic goods can benefit from price reductions as increased quenatity will be demanded potentially improving their terms of trade. exports become cheaper so demand increases.

Inelastic goods, price reductions do not significantly increase the quantity sold which can worsen terms of trade