Th4.1: Terms of Trade

Question 1

Measured in the form of…. and why?

Answer 1

an index because it is calculated from the weighted average of thousands of different export and import prices

Question 2

Formula

Answer 2

average export price index
—————————————- x 100
average import price index

Question 3

What do the terms of trade measure?

Answer 3

the rate of exchange of one product for another when two countries trade

Question 4

What do the terms of trade tell us?

Answer 4

tells us the quantity of exports that need to be sold in order to purchase a given level of imports

Question 5

Movement in the terms of trade is said to be favourable if…

Answer 5

favourable if the terms of trade increase as the country can buy more imports with the same level of exports - an IMPROVEMENT in the terms of trade

Question 6

Movement of the terms of trade is said to be unfavourable if…

Answer 6

unfavourable if they decrease when export prices fall or import prices rise - called a DETERIORATION