Terms of Trade

Question 1

What are the Terms of Trade?

Answer 1

Measures the relative movements in the prices of exports/imports.
The price we receive from exports and pay for imports.
Having a significant influence on the trade/current account balance, exchange rate and national income.

Question 2

How do we calculate the TOT?

Answer 2

TOT = XPI/MPI x 100
If there is a rise in X/fall in M - TOT will usually rise.
If there is a fall in X/rise in M - TOT will usually fall.

Question 3

What is it meant by the XPI?

Answer 3

XPI = P of a good (yr 2)/P of a good (yr 1) x 100

Find relative value of exports across two different time periods.

Question 4

What is it meant by the MPI?

Answer 4

MPI = P of a good (yr 2)/P of a good (yr 1) x 100

Find relative value of imports across two different time periods.

Question 5

What is a favourable TOT?

Answer 5

XPI rises > MPI (e.g. increase iron P):
More M can be purchased from a given volume of X.
Effects - 
- Increase in the trade balance.
- Increase in national Y.
- Aggregate D increases.
- Rise in SOL.
- Investment/employment increase.
- AUD appreciates.
- CPI (inflation) rises.

Question 6

What is an unfavourable TOT?

Answer 6

MPI rises > XPI (e.g. increase oil P):
Less M can be bought with a given volume of X.
Effects - 
- Decreased trade balance.
- Decreased national Y.
- Aggregate D decreases.
- Fall in SOL.
- Investment/employment falls.
- AUD depreciates.
- CPI (inflation) falls.

Question 7

Is there a link between the TOT and Trade Balance?

Answer 7

Yes, showing a direct relationship; with TOT impacting trade balance - favourable TOT will increase the trade balance as value of exports are increased.

Question 8

Australia TOT trends:

Answer 8

2016 - 2018 (favourable) - main growth in XPI

2011 - 2016 (unfavourable) - main drop in XPI - post mining boom.