Terms of Trade

Question 1

How can we calculate the terms of trade?

Answer 1

1. ) Select a representative group of exports and imports
2. ) Take a weighted average according to the relative importance of the item on the index
3. ) A base year is selected and assigns an index value of 100
4. ) The index for each year is calculated by dividing the total price for each year by the total price of the base year and then multiplying by 100

Question 2

Definition of Terms of Trade

Answer 2

The terms of trade is an index which measures the relative movements in the prices of exports and imports

Question 3

An improvement in the terms of trade may result from…

Answer 3

(i) Export prices rising faster than import prices
(ii) Exports prices rising while import prices remain constant
(iii) Export prices rising while import process remain constant
(iv) Export prices remain constant while import prices fall
(v) Import prices falling faster than export prices

Question 4

Deterioration in the terms of trade may be caused by…

Answer 4

(i) Import prices rising faster than export prices
(ii) Import prices rising while export prices remain constant
(iii) Import prices rising while export prices fall
(iv) Import prices remaining constant while export prices fall
(v) Export prices falling faster than import prices

Question 5

Factors affecting the ToT (XPI)

Answer 5

• Commodity prices
• Global growth
• Lower Australian dollar
• Microeconomic reform

Question 6

Factors affecting the ToT (MPI)

Answer 6

• Globalisation
• Microeconomic reform
• China is the world’s largest exporter
• The dramatic decline in oil (petrol) prices

Question 7

Reasons for changes in the ToT (2016-2018)

Answer 7

Commodity prices –
• rebound in the last two years
Increase in iron ore and coal prices,
• high weighting on the export index. They make up 23% of our total exports. Rural commodities have also seen a substantial increase in prices beef, sugar, wheat.
Global Growth
• India and China: strong demand from developing economies particularly China and India. China’s growth has slowed but recent improvement in construction and manufacturing and steel prices have improved.
Appreciation of the Australian Dollar
• The relatively higher Australian dollar is making exports more expensive and imports cheaper. This is contributive to the improvement in the Terms of Trade (ToT)
Microeconomic reform – efficiency and productivity, increased export competitiveness.

Question 8

The effects of changes in the terms of trade

Answer 8

• The business cycle
• Output and employment
• The trade and current account balance un the balance of payments
• The exchange rate
• National income
• Investment

Question 9

The effect of the terms of trade on national income

Answer 9

• In increase in the terms of trade causes an increase in national income
• A decrease has the opposite effect.