Terms of Trade(HL)

Question 1

What is the Terms of Trade?

Give the definition and the equation

Answer 1

A measure of the weighted index of export prices over the weighted index of import prices for a country. It tells us about the relative purchasing power of a country’s exports relative to its import prices, or the relative volume/value of imports that can be bought with an average unit of export.

Note: It does not account for the total volume of goods or services, and can’t be used to compare current account. (A high terms of trade isn’t always a good thing)

Equation: Avg export price index/Avg import price index *100

Question 2

What are the short term causes of terms of trade changes? There are four of them

Answer 2

• Demand of imports and exports
• Changes in global supply of key inputs/ FOP’s
• Changes in relative exchange rate
• Changes in relative inflation rate

Question 3

What are the long term causes of terms of trade changes?

Three of them

Answer 3

• World income levels
• Changes of productivity within the country
• Technological advancements