Terms of tade

Question 1

Terms of Trade calculation

Answer 1

index of export prices / index of import prices x 100

Question 2

Terms of Trade definition

Answer 2

The average price of a country’s exports relative to the average price of its imports.

Question 3

Factors influencing a country’s terms of trade

Answer 3

1. relative inflation rates (if inflation rate is higher than trading partners = export prices are rising relative to import prices = increase terms of trade)
2. Changes in raw material prices (if imports raw martials = rise in imported raw material prices = fall in terms of trade)
3. Changes in exchange rate (if exchange rate increases relative to those of other countries = exports prices will rise & import prices would fall = increase in terms of trade)
4. Tariffs (if country imposes a tariff on imported goods = increase in import prices = fall in terms of trade)
5. Dependency on primary productions (dependent on primary products = terms of trade decrease over time)

Question 4

Impact of changes in terms of trade

Answer 4

1. Living standards (increase in terms of trade = country has export less to buy a given quantity of imports = higher standard of living )
2. Balance of payments on current account (increase of terms of trade = export prices rising relative to import prices = less competitive = deterioration in balance of payments = depreciation in exchange rate)
3. Rate of inflation (fall in terms of trade may be due to an increase in imported raw materials = cost push inflation)
4. Developing countries (ownership of raw materials = appreciation in exchange rate = increase in terms of trade = loss of competitiveness of their manufactured goods and services = slower economic growth)