Terms Of Trade

Question 1

What is productivity puzzle

Answer 1

Sudden stop in growth of productivity - 2008-2009 financial crisis

Question 2

Definition of ToT + what (2)

Answer 2

Measure the rate of exchange of one product for another - when 2 countries trade
Tells us quantity of exports that need to be sold in order to purchase a given level of imports

Question 3

Two types of terms + what (6)

Answer 3

Favourable = Improvement = same level of exports means but more imports
Unfavourable = deterioration = current exports means reduced imports

Question 4

How to calculate ToT formula

Answer 4

(Index of average export price / index of average import price) x 100

Question 5

When is there improvement / deterioration of trade (2)

Answer 5

Exports dearer imports cheaper = improvement in ToT
Exports cheaper imports dearer = deterioration in the ToT

Question 6

Why favourable and unfavourable good and bad (2)

Answer 6

Improve = improvement in living standards = imported goods appear cheaper to consumers
Deterioration = Decline in SoL as foreign currency from exports are less + imports = expensive

Question 7

Improved ToT means what (3)

Answer 7

Very unit of export sold = buy more imports
Beneficial effect on domestic cost push inflation = falling import prices relative to export
However = worse BoP

Question 8

Worse ToT means what (3)

Answer 8

Cost push inflation worsens
Domestic production increases
Better BoP

Question 9

Effect of devaluation (4)

Answer 9

Currency falls = increased price of imports = WPIDEC
Domestic price doesn’t change = uk consumer pay same price
But foreign currency price chnages = German buy more British goods with less euro
After devaluation = deterioration

Question 10

Factors influencing terms of trade (4)

Answer 10

exchange rate
Competitiveness of firms
Relative inflation rates
Profit margins

Question 11

Exchange rate influence what (3)

Answer 11

Fall in ER = worse ToT = Because exports cheaper

Question 12

Competitiveness of firms

Answer 12

Export prices effected by cost of raw materials + productivity

Question 13

Relative inflation prices influence (3)

Answer 13

Higher UK inflation would cause improvement in ToT
Because UK export prices would be rising faster than import prices
Though inflation is likely to cause a depreciation in the exchange rate which will cause exports to then fall in price

Question 14

Profit margins effect ToT (6)

Answer 14

Long run = profit making company will keep prices low to keep competitiveness
Short run = pass onto consumer = increase prices = worse ToT

Question 15

Impact of changes of ToT (3)

Answer 15

Relevance of PED
Economic objectives
What caused ToT to change

Question 16

PED - impact of ToT (2)

Answer 16

If ped of E+I is inelastic
A favourable movement in ToT would improve BoP

Question 17

Economic objectives (5) - impact on ToT NEGATIVE

Answer 17

Improvement in the ToT = fall in GDP + rise in unemployment = domestic production falls
Long term deterioration = decline in living standards as less imports can be bought

Question 18

What caused change - impact on ToT (4)

Answer 18

Improvement = increased demand for exports = beneficial
Deterioration = improvement in international competitiveness = beneficial
The export + import revenues are more important than the price alone
For an improvement to be beneficial, export revenues must increase.