Terms of Trade

Question 1

TOT Formula

Answer 1

Weighted Average of Export Prices / Weighted Average of Import Prices x 100%

Question 2

TOT definition

Answer 2

Amount of import goods an economy can purchase per unit of export goods

Measure of countries relative competitiveness

Question 3

Why is TOT important?

Answer 3

It is more crucial for developing countries as they are dependent on a narrow range of primary exports to fund essential imports

Question 4

Factors affecting TOT in the short run

Answer 4

Demand/Supply of Exports/Imports

• High demand, price increases
• High supply, price decreases

Relative inflation rate

• high relative inflation rate, P of X high
• improvement in TOT but actually decrease competitiveness

Exchange Rate
- Appreciation : Pm low, Px high

Question 5

Factors affecting TOT in the long run

Answer 5

Productivity/Technology

• cost of production low
• P of X low
• Deterioration but increase competitiveness

Income

• Deterioration for countries that depend on natural resources exports
• Low income elasticity of D for these X
• Real world income has grown, D for X increase relatively lesser

Question 6

Evaluation

Answer 6

International competitiveness

Quantity of X and M

PED of X and M

Question 7

Impacts of an Improvement in TOT

Answer 7

Living standards
- a country can buy greater quantity of imports of any given quantity of exports

Improvement in growth and employment
- if TOT improves because of D for X increase

BOP
- Depend of why TOT improves