Terms of Trade Flashcards
1
Q
How to calculate terms of trade?
A
Index of average export price
——————————————– x 100
Index of average import price
2
Q
What are terms of trade?
A
Ratio of export prices to import prices
3
Q
What factors affect terms of trade?
A
1.; Inflation rate (higher cost level, lower competitiveness, lower export)
- Productivity rates (more efficient, lower COP, more competitiveness, more export)
- Exchange rate (weaker pound valuation, more export)
4
Q
How does inflation rate affect terms of trade?
A
Higher cost level leads to lower competitiveness and lower export
5
Q
How do productivity rates affect terms of trade?
A
More efficient production leads to lower cost of production (COP), more competitiveness, and more export
6
Q
How does exchange rate affect terms of trade?
A
Weaker pound valuation leads to more export
7
Q
What is the impact of changes in a country’s terms of trade?
A
GDP growth and employment
