Terms of Trade Flashcards
1
Q
Terms of trade formula
A
index of export prices/ index of imports prices x 100
2
Q
What does the terms of trade tell us?
A
how expensive our exports are relative to our imports
3
Q
How does an increase in export prices affect the terms of trade?
A
improve
4
Q
How does an increase in import prices affect the terms of trade?
A
deteriorate
5
Q
Factors influencing a country’s terms of trade
A
- raw material prices
- changes in tariffs
- changes in exchange rates
- inflation rates
6
Q
Impact of changes in terms of trade?
A
- living standards (deterioration = decreased living standards)
- competitiveness (deterioration = improved competitveness)
7
Q
What will an increase in competitiveness lead to?
A
- employment (derived demand)
- real GDP (shift out AD)
- improved current account deficit (tax rev)
