The Terms of Trade Flashcards
Define the terms of trade
The terms of trade is an index which measures the relative movements in the prices of imports and exports
How is the terms of trade measured?
XPI/MPI x 100
Explain how the terms of trade could increase if XPI increases
The terms of trade would rise if XPI increases as to purchase a given quantity of imports will require a smaller quantity of exports. The terms of trade will rise if export prices rise
Explain the link between the commodity price index and the XPI
The most important determinant of Australia’s of Australia’s XPI are commodity prices.
Explain why the terms of trade fell after 2012
Between 2011-16, Australia’s terms of trade fell by around 35%, signalling the end of the resources boom. Throughout this period, the XPI fell by 26% due to the large falls in commodity prices. The MPI increased by around 12% over the same period.
Explain how changes in the terms of trade affect the trade balance
The terms of trade measures changes in the prices of imports and exports while the trade balance measures changes in the value of exports and imports. Generally, they show a positive relationship. A rise in the terms of trade will increase the trade balance by increasing the value of exports
A rise in the terms of trade affect the exchange rate?
A strong terms of trade will lead to an appreciation of the exchange rate
What is the real gross domestic income (real GDI)?
GDP adjusted for the terms of trade is known as gross domestic income. GDI is a better measure of a country’s real purchasing power.
What effect has China had on Australia’s XPI and MPI?
If the Chinese economy expands, the demand for resources will increase which will boost world commodity prices and increase Australia’s XPI. This would be advantageous to Australian exporters such as BHP, they would be able to sell their exports for higher prices, increasing their export revenue.
Explain the problem of ‘Dutch Disease’
The problem of a very high exchange rate is known as ‘Dutch disease’. A higher Australian dollar is good for consumers it is a disadvantage for domestic producers and exporters not in the mining sector because it reduces their competitiveness
Did the resources boom affect all sectors of the economy equally?
The mining boom resulted in a ‘two-speed’ economy. The mining sector grew at a fast pace but other domestic industries, adversely affected by the high exchange rate, grew at a much slower speed.
