Theme 4:1.4:Terms of Trade

Question 1

what is terms of trade(ToT)?

Answer 1

measures how the prices of a country’s export prices are changing compared to its import prices.

Question 2

what are the short run factors that influence ToT?

Answer 2

-change in exchange rate-changes X and M prices
-inflation-rise in inflation is likely to improve the ToT
-change in demand for for X&M

Question 2

what are the short run factors that influence ToT?

Answer 2

-change in exchange rate-changes X and M prices
-inflation-rise in inflation is likely to improve the ToT
-change in demand for for X&M

Question 3

what are the long run factors that influence ToT?

Answer 3

-rise in productivity-lower production costs
-changing incomes-affect the pattern of demand

Question 4

what is the formula for the index of terms of trade.

Answer 4

index of export prices/index of import prices X100

Question 5

what are the impacts of a change in ToT?

Answer 5

-if PED is inelastic then a favourable movement will improve the current account whereas if PED is elastic then it will worsen the current account balance

-an improvement is likely to lead to a fall in GDP because if caused by a rise in export prices and fall in import prices then current account balance will worsen