Terms Of Trade

Question 1

What does the term of trade measure?

Answer 1

Refer to the ratio of a country’s average price of exports to the country’s average price of imports.

Question 2

What is the calculation for terms of trade?

Answer 2

Index average export prices
—————————————— x 100
Index average import prices

Question 3

What are factors that influence terms of trade?

Answer 3

Relative inflation rates
Relative productivity rates
Changes in the exchange rate

Question 4

What are the impacts of the terms of trade changing?

Answer 4

Changes to current account balance
Changes to national output (GDP)
Changes to unemployment levels
Changes to the international competitiveness
Changes to disposable income
Changes to standards of living

Question 5

Why might the terms of trade improve?

Answer 5

Switching to specialisation to higher value exports
Worlds real income changes
Exchange rate appreciate causing import prices to fall
Fall in the world price of imported technology

Question 6

Why might terms of trade deteriorate?

Answer 6

Increase in countries producing the same good
Increase in technological advances meaning cost to export decreases
World income level may change
Depreciation of the exchange rates