terms of trade

Question 1

how is the terms of trade calculated?

Answer 1

weighted average of exports/ weighted average of imports x 100
basket of exports/ imports prices

Question 2

what is featured in the terms of trade?

Answer 2

the most popular exports sold by a nation is featured and weighted according to the revenues brought in
an overall price of these exports is then generated
(same done for imports)

Question 3

what is the terms of trade?

Answer 3

terms of trade is an index, so is put into index form
each year a new terms of trade is calculated and is then given an index number and compared back to the base year
base year= 100

Question 4

what does the terms of trade tell us?

Answer 4

terms of trade tells us the quantity level of exports that need to be sold in order to purchase a given level of imports

Question 5

what do you look for when comparing terms of trade figures?

Answer 5

looking for an improvement of terms of trade (figure gone up) or whether its gone down

Question 6

what does an improvements in the terms of trade imply?

Answer 6

improvement in terms of trade implies that the price basket of exports can buy more in terms of imports than what it couldve before and vice versa

Question 7

how would the terms of trade improve?

Answer 7

• export prices have increased
• import prices have decreased

Question 8

what short run factors can change the figures of the terms of trade?

Answer 8

changes short run factors
- changes in demand/supply of exports/imports
- if demand for a given export increases, this will increase the price of exports→ improvement in terms of trade
- relative inflation rates
- if a country has high inflation rates, this may push up the prices of their exports
- reduce competitiveness of the countries exports
- changes in exchange rates

Question 9

what long run factors can change the figures of the term of trade?

Answer 9

incomes
technology
productivity

Question 10

how can incomes affect the terms of trade figure

Answer 10

income elasticity of demand for these imports/exports

Question 11

how can technology change the terms of trade figure

Answer 11

• lower cost of p, and therefore lower prices of exports for both technology and productivity
• this leads to deterioration of terms of trade, however this isnt always bad as it:
• increases competitiveness of a nation
• quantity of exports sold may increase

Question 12

what does the terms of trade equation assume and when does this theory hold?

Answer 12

as terms of trade improves, the equation suggests that the quantity levels of export demanded remains exactly the same→ large assumption
as a result of this assumption→ as a result of an improvement, a country can buy in more exports than they couldve before
this theory only holds, if an improvement of terms of trade translates into higher export revenues

Question 13

what does there need to be for there to be an increase in export revenue?

Answer 13

for an increase in revenue there needs to be an increase in demand as there will be a higher price due to higher quantity

Question 14

how would you show the effect of an increase in demand on revenue?

Answer 14

improvement in terms of trade

Question 15

how can terms of trade be evaluated?

Answer 15

• will this translate into higher export revenues?
• whats gonna happen to quantity?

Question 16

what affects whether relative inflation is good or bad for a nations exports/TOT?

Answer 16

if theres high relative inflation, according to terms of trade there will be an improvement in the terms of trade because export prices have increased
- demand for revenues needs to be price inelastic for export revenue to increase when prices are high
- if demand is elastic, export revenue will fall
(so you look at elasticity of demand for imports)

Question 17

what do the impacts of the terms of trade depend on?

Answer 17

• if productivity increases or theres improvements in technology this will increase a nations international competitiveness
  
  • can increase quantity produced
  • more exports can be sold even if price is lower
• depends of quantities or revenues of exports/imports being sold
• depends on elasticity of demand for imports/ exports
  
  • therefore determining effect of the current account position
  • and therefore effect AD