Macro A2 - Terms Of Trade ✔️

Question 1

Terms of trade

Answer 1

• The relationship between the prices of a country’s exports and the prices of its imports.
• It is often used as an indicator of a country’s competitiveness in international trade.

Question 2

Terms of trade calculation

Answer 2

price of the exports / price of the imports x 100

Question 3

Factors influencing a country’s terms of trade

Answer 3

Exchange rate: Changes in a country’s exchange rate can also affect its terms of trade. A depreciation of the domestic currency can make exports cheaper and imports more expensive, thereby improving the terms of trade.

Commodity prices: A country that heavily relies on the export of a single commodity may experience large fluctuations in its terms of trade due to changes in the price of that commodity.

Competition and market structure: The level of competition in a country’s export markets and the structure of these markets can also affect its terms of trade.

Political and economic stability: Political instability and economic uncertainty in a country can also affect its terms of trade. For example, a period of economic uncertainty may lead to a decline in demand for a country’s exports, reducing its terms of trade.

Question 4

The impact of changes in a country’s terms of trade

Answer 4

Balance of trade: An improvement in a country’s terms of trade will generally result in a trade surplus, meaning that the value of its exports exceeds the value of its imports.

Economic growth: An improvement in the terms of trade can stimulate economic growth by increasing the demand for a country’s exports and boosting its foreign currency earnings.

Inflation: Changes in the terms of trade can impact inflation by affecting the prices of imports and exports.

Exchange rate: Changes in the terms of trade can also impact a country’s exchange rate. An improvement in the terms of trade can lead to an appreciation of the domestic currency, making exports more expensive and imports cheaper

Income distribution: Changes in the terms of trade can impact the distribution of income within a country.

Government revenue: Changes in the terms of trade can also impact a country’s government revenue. For example, an improvement in the terms of trade can increase the government’s foreign currency earnings and boost its tax revenue

Question 5

Short-run international competitiveness factors

Answer 5

• inflation
• exchange rate