The Terms of Trade

Question 1

Terms of Trade

Answer 1

The ratio of export prices to import prices

TOT = Weighted average of export prices
__________________________ x 100
Weighted average of import prices

Question 2

If TOT increases

If TOT decreases

Answer 2

Average Price of exports increase and/or average price of imports decrease

Average Price of exports decrease and/or average price of imports increase.

Improvement of TOT mean that the country can buy more imports without using government spending (only using money with exports alone)

Question 3

Cause of Changes in TOT - SR

Answer 3

Exchange Rates movement

Changes in demand and supply of imports and exports

Relative inflation rates. High inflation means price of exports are higher which improves TOT (dependent on elasticity)

If country does not import/export more, TOT won’t change much based on exchange rates but TOT will change significantly if exports and imports is high.

Question 4

Cause of Changes in TOT - LR

Answer 4

Changes in Income - Increase in disposable income, increase in marginal propensity to spend and import.

Productivity - May decrease imports if output increases, exports will also increase

Technological Advancements - Technological advancements may decrease imports if output increases, exports will also increase.

Question 5

World Trade Organization (WTO)

Answer 5

The World Trade Organization is an intergovernmental organization that regulates international trade.

Not a trading bloc, but they work closely to them.
Set up in 1995