Terms Of Trade

Question 1

To T

Answer 1

Ratio of X prices to M prices

Question 2

Improvement of To T

Answer 2

X prices increase relative to M prices .

Question 3

Deterioration of Tof T

Answer 3

M prices increase relative to x prices … better LS bc MgIs appear cheaper to C

Question 4

factors affecting To T (5)

Answer 4

• Ex Rate
- Change M/X prices eg. Increase Ex Rate … decrease price Mgs So improve To T

• inflation (in economies of country’s main trading partners)
- Increase inflation relative to other counties so improve To T

• D for X & M
- change D … change M /X prices

• Productivity
- increase productivity compared to country main trading partners … decrease X prices bc increase productivity … decrease Cof P So deterioration of ToT

• Incomes
change income… Change D eg. Increase incomes … increase … increase prices … improve To T

Question 5

Effect of changes ToT on BofP (4)

Answer 5

• X price elastic
- Increase X price … decrease volume gs Xed
- Total valve of X= Avg price x volume so increase X Prices w/elastic D … lower value X So improve Tof BUT worsen Current ace on BofP

• X price inelastic
- increase X price … improve ToT & Current Acc

• M price elastic
- deterioration of ToT … decrease volume & improve current ace

• M price inelastic
- increase M Prices … deterioration To T & current acc

Question 6

Effects of changes in ToT in domestic economy

Answer 6

improve ToT by decrease M prices … increase M volume … lower inflation be lower M prices put downward pressure of Prices