Terms of Trade

Question 1

Define terms of trade

Answer 1

Average price of a country’s exports relative to the average price of its imports

Question 2

How do you calculate terms of trade?

Answer 2

(Index of export prices/index of import prices) x 100

Question 3

State the factors that influence a country’s terms of trade?

Answer 3

1) Relative inflation rates
2) Changes in raw material prices
3) Changes in exchange rates
4) Tariffs

Question 4

How do relative inflation rates influence a country’s terms of trade?

Answer 4

⬆️ inflation means that export prices ⬆️ relative to import prices … -> ⬆️ terms of trade

Question 5

How do changes in raw material prices influence a country’s terms of trade?

Answer 5

If a developed country for example imports nearly all its raw materials then an ⬆️ in raw materials prices-> ⬆️ in import prices and …-> ⬇️ terms of trade

Question 6

How do changes in exchange rates influence a country’s terms of trade?

Answer 6

If a country’s exchange rate ⬆️ relative to other countries-> import prices ⬇️ and export prices ⬆️-> ⬆️ in terms of trade

Question 7

How do tariffs influence a country’s terms of trade?

Answer 7

If a country imposes a tariff on imported 🚘-> ⬆️ import prices-> ⬇️ terms of trade

Question 8

What can changes in a country’s terms of trade impact?

Answer 8

1) Living standards
2) Balance of payments on current account
3) Inflation
4) Developing countries

Question 9

What is the impact of changes in a country’s terms of trade on living standards?

Answer 9

⬆️ in terms of trade is ‘improvement’- country needs to export ⬇️ to gain given quantity of imports (as exports ⬆️ expensive OR imports cheaper OR combination of both) … ⬆️ standards of living for country’s citizens

⬇️ in terms of trade is ‘deterioration’- country needs to export ⬆️ to gain given quantity of imports (as exports cheaper OR imports ⬆️ expensive OR combination of both) … ⬇️ standards of living for country’s citizens

Question 10

What is the impact of changes in a country’s terms of trade on the balance of payments on current account?

Answer 10

⬆️ in terms of trade-> ⬆️ expensive exports relative to imports … -> ⬇️ competitiveness of 🚘 and 🧹-> ⬇️ exports and ⬆️ imports … deterioration

⬇️ in terms of trade-> ⬆️ expensive imports relative to exports … -> ⬆️ competitiveness of 🚘 and 🧹-> ⬆️ exports and ⬇️ imports … improvement

Question 11

What is the impact of changes in a country’s terms of trade on the rate of inflation?

Answer 11

⬇️ in terms of trade-> ⬆️ inflation if ⬇️ caused by ⬆️ import prices (cost push inflation)

⬆️ in terms of trade-> ⬇️ inflation (disinflation) if ⬆️ caused by ⬇️ import prices (cost push disinflation)

Question 12

What is the impact of changes in a country’s terms of trade on developing countries?

Answer 12

👎 impact- resource rich developing countries suffer from ‘resource curse’- ownership of minerals and fuels ⛽️ etc-> appreciation in exchange rate of developing country-> ⬆️ terms of trade BUT ⬇️ competitiveness of 🚘 and 🧹-> slower economic growth