Th4.1: Factors Influencing a Country's Terms of Trade

Question 1

What are the five factors influencing a country’s terms of trade?

Answer 1

rise in export / fall in import
exchange rates, inflation and changes in demand/supply of exports/imports
improvement in productivity
changing incomes
in general...

Question 2

Rise in export / fall in import

Answer 2

an improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices. a deterioration will be caused by a fall in export prices or increase import prices

Question 3

Exchange rates, inflation and changes in demand/supply of imports/exports

Answer 3

in the short run, exchange rates, inflation and changes in demand/supply of imports/exports affect the terms of trade since these affect the relative prices of imports and exports

Question 4

Improvement in productivity

Answer 4

in the long run, an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices. this can. be caused by new tech, more efficient labour e.t.c

Question 5

Changing incomes

Answer 5

another long run factor. affects the pattern of demand for goods and services. the Prebisch-Singer hypothesis suggests that the long run of primary goods declines in proportion to manufactured goods, meaning those dependent on primary exports will see a fall in their trade of terms

Question 6

In general…

Answer 6

anything which affects the price of a country’s imports or exports will affect its terms of trade