Terms Of Trade Flashcards
What is terms of trade
Terms of trade measures the relative export prices compared to relative import prices
Whatis teh equation fi terms fo trade
Weighted average of exports prices / weighted average of import prices x 100
In year 1 TOT was 100 and in year 2 TOT was 106, what does this mean?
In year 2 One basket of exports can buy 6% more imports compared to year 1
What is an improvement in TOT and what cause it
An improvement in TOT is when the price of exports increases
- this can happen by import prices falling
- or export prices increasing
What is a deterioration and when does this occur
When the price of exports fall in comparison to imports
This can occur if there is a fall in export prices or an increase in import prices
What are some shirt run factors whuch effect TOT
- Demand and supply of imports and exports
- relative inflation rate
- relative exchange rate
What are some long run factors which affect TOT
- incomes -> prebisch singer hypothesis
- productivity
- technology
How does demand and supply affect TOT
- increase in demand of exports leads to an increase in price
- decrease in demand of exports leads to a decrease in price
- increase in supply of exports leads to decrease in price
- decrease in supply of exports leads to a increase in price
How does inflation rate affect TOT
A High inflation rate in comparison to other countries means the price of exports will also increase which leads to improvement in TOT
How does income affect TOT (prebisch singer hypothesis)
Long term trends in income changes such as increases in incomes lead to deterioration of terms of trades in developing countries. This is because manufactured goods are more income elastic than primary products, which means as incomes increase the demand for manufactured goods increases more than the demand for primary products which leads manufactured food prices to increase faster than primary products which leads to a deterioration in terms of trade
How does productivity and technology advance,ents affect tot
- decreases the costs of production for the country which leads to lower prices therefore deterioration in TOT
