Terms of Trade

Question 1

If the price of Benin’s cotton exports increases, what will happen to Benin’s terms of trade?

Answer 1

Increase
If the price of exports increases then the terms of trade will also increase. This is because the top number in the terms of trade fraction will be higher.

Question 2

If the price of Benin’s harvester imports decreases, what will happen to Benin’s terms of trade?

Answer 2

Increase
If the price of imports decreases then the terms of trade will increase. This is because the bottom number in the terms of trade fraction will be lower. Dividing by a smaller number will lead to a larger answer.

Question 3

If the price of Benin’s cotton exports decreases, what will happen to Benin’s terms of trade?

Answer 3

If the price of exports decreases then the terms of trade will also decrease. This is because the top number in the terms of trade fraction will be lower.

Question 4

If the price of Benin’s harvester imports increases, what will happen to Benin’s terms of trade?

Answer 4

If the price of imports increases then the terms of trade will decrease. This is because the bottom number in the terms of trade fraction will be higher. Dividing by a larger number gives a smaller answer.

Question 5

When the terms of trade increase we say that they have:

Answer 5

When the terms of trade increase we say that they have improved.

Question 6

When the terms of trade decrease we say that they have:

Answer 6

When the terms of trade decrease we say that they have deteriorated.

Question 7

Terms of Trade Formula

Answer 7

The terms of trade formula equals the index of export prices divided by the index of import prices, multiplied by 100.

Question 8

Improvement in Terms of Trade

Answer 8

An improvement in the terms of trade means that there has either been an increase in the index of export prices or a decrease in the index of import prices.

Question 9

Deterioration in Terms of Trade

Answer 9

A deterioration in the terms of trade means that there has either been a decrease in the index of export prices or an increase in the index of import prices.

Question 10

correct formula for terms of trade?

Answer 10

Terms of trade = (Index of export prices/Index of import prices) x 100

Question 11

If oil prices rise, what will be the effect on the index of import prices for countries who import oil?

Answer 11

The index of import prices measures the average price of imports. So, if oil prices rise then the index of import prices for oil importers will also increase.

Question 12

An increase in the price of oil increases the index of import prices for countries who import oil. If the index of import prices increases, what will happen to these country’s terms of trade?

Answer 12

If the index of import prices increases then the terms of trade will decrease (deteriorate).

This is because the bottom number in the terms of trade fraction will be higher. Dividing by a larger number gives a smaller answer.

Question 13

If oil prices decrease, what will be the effect on the terms of trade of a country who imports oil?

Answer 13

The decrease in oil prices will decrease the index of import prices. If the index of import prices decreases then the terms of trade will increase (improvement).

Question 14

Which of the following shows the impact of a decrease in the cost of raw materials?

Answer 14

Developing countries usually export raw materials. They will see a deterioration in their terms of trade as the cost of raw materials decreases.

Developed countries usually import raw materials. They will see an improvement in their terms of trade as the cost of raw materials decreases.

Question 15

What will be the likely impact of Trump’s 30% “America First” tariff? on tot

Answer 15

The tariff will increase the index of import prices.

This will deteriorate America’s terms of trade as the bottom number of the fraction will be larger. Dividing by a bigger number gives a smaller answer

Question 16

What will be the likely impact of Argentina removing a 35% tariff on imported laptops?

Answer 16

The removal of the tariff will decrease the index of import prices.

This will improve Argentina’s terms of trade as the bottom number of the fraction will be smaller. Dividing by a smaller number gives a larger answer.

Question 17

An exchange rate

Answer 17

An exchange rate is the price of one currency in terms of another.

Question 18

What is the impact of a depreciation in the exchange rate on the index of export prices and the import prices for the UK?

Answer 18

A depreciation will make imports more expensive and exports cheaper (opposite of SPICEE). This will increase the index of import prices and decrease the index of export prices.

Question 19

What is the impact on the UK’s terms of trade if the index of export prices decreases and the index of import prices increases?

Answer 19

A decrease in export prices and an increase in import prices will both have the impact of leading to a deterioration in the terms of trade.

Question 20

What is the impact on the UK’s terms of trade if the pound appreciates?

Answer 20

Improvement.

An appreciation of the pound will make imports cheaper and exports more expensive.

A decrease in import prices and an increase in export prices will both have the impact of leading to an improvement in the terms of trade.

Question 21

What impact do you think Switzerland’s positive inflation rate had on its terms of trade?

Answer 21

To know how Switzerland’s inflation rate will affect its terms of trade, we actually need more information about the inflation rates in other countries.

Question 22

If Switzerland’s index of import prices is rising by more than its index of export prices, what is the impact on the terms of trade?

Answer 22

There will be a deterioration in Switzerland’s terms of trade as imports are increasing in price by more than exports.

Question 23

If the UK’s export prices are rising by more than its import prices, what is the impact on its terms of trade?

Answer 23

There will be an improvement in the UK’s terms of trade as exports are increasing in price by more than imports.

Question 24

Impact of Raw Material Prices on Terms of Trade

Answer 24

An increase in raw material prices will deteriorate the terms of trade for countries who import raw materials and improve the terms of trade for countries who export raw materials.

Question 25

Impact of Tariffs on Terms of Trade

Answer 25

An increase in tariffs will deteriorate the terms of trade and a decrease in tariffs will improve the terms of trade.

Question 26

Impact of Exchange Rates on Terms of Trade

Answer 26

An exchange rate depreciation will deteriorate the terms of trade and an appreciation will improve the terms of trade.

Question 27

Impact of Inflation Rates on Terms of Trade

Answer 27

A low inflation rate relative to trading partners will deteriorate the terms of trade and a high inflation rate relative to trading partners will improve the terms of trade.

Question 28

If the relative price of UK exports has increased, what has happened to the competitiveness of these exports?

Answer 28

If the relative price of exports has increased (they are now relatively more expensive), then the exports are less competitive - competitiveness has decreased.

Question 29

What impact should an improvement in the terms of trade have on competitiveness?

Answer 29

An improvement in the terms of trade can lead to a decrease in competitiveness as exports become more expensive relative to imports.

Question 30

What is the likely impact of an increase in competitiveness?

Answer 30

An increase in competitiveness will increase exports which will increase real GDP, increase employment and improve the current account.

Question 31

Which of the options below shows the likely impact of a deterioration in the terms of trade?

Answer 31

A deterioration in the terms of trade will lead to an increase in competitiveness as the relative price of exports has decreased. This will increase exports which will increase real GDP, increase employment and improve the current account.

Question 32

Impact of Terms of Trade on Living Standards

Answer 32

An improvement in the terms of trade will increase living standards and a deterioration in the terms of trade will decrease living standards.

Question 33

Impact of Terms of Trade on Competitiveness

Answer 33

An improvement in the terms of trade will decrease competitiveness and a deterioration in the terms of trade will increase competitiveness.

Question 34

Which of the options below describes the impact of an increase in raw material prices?

Answer 34

An increase in raw material prices for a net importer of raw materials will mean that import prices will increase. An increase in import prices will lead to a deterioration in the terms of trade.

If the terms of trade deteriorate then living standards will decrease. This is because the price of imports becomes more expensive relative to the price of exports, meaning consumers can afford fewer imports.