TOT PPT 1 Flashcards
What is the Terms of Trade (ToT)?
An index measuring the relative movement in export and import prices.
Does ToT consider quantity?
No, it only measures price changes.
What do XPI and MPI represent?
XPI = Export Price Index, MPI = Import Price Index, both measured as index numbers relative to a base year.
What is the formula for Terms of Trade?
ToT = (Export Price Index (XPI) / Import Price Index (MPI)) × 100
If the Terms of Trade increases, what could be the reason?
XPI increased, MPI decreased, or both.
If the Terms of Trade decreases, what could be the reason?
XPI decreased, MPI increased, or both.
How does an increase in ToT impact the economy?
Higher national income, increased GDP, inflation, improved living standards, and business confidence.
What is a favorable movement in ToT?
When ToT rises, meaning export prices increased relative to import prices.
What is an unfavorable movement in ToT?
When ToT falls, meaning import prices rose faster than export prices.
Can ToT fall even if both XPI and MPI increase?
Yes, if MPI increases at a faster rate than XPI.
Why is ToT important for the economy?
It reflects how much imports can be purchased with a given volume of exports.
How does ToT affect macroeconomic variables?
It influences real GDP, national income, exchange rates, and the trade balance.
How does ToT relate to the trade balance?
A higher ToT improves the trade balance by increasing export revenue.
How does an increase in ToT affect employment?
Higher export earnings boost employment and economic activity.
How does ToT affect inflation?
Higher ToT can lead to higher inflation due to increased national income and demand.
If XPI = 109 and MPI = 108, what is ToT?
ToT = (109 / 108) × 100 = 100.92
If XPI = 104 and MPI = 107, what is ToT?
ToT = (104 / 107) × 100 = 97.91
If ToT increased from Year 2 to Year 3, what could be the cause?
XPI increased, MPI decreased, or both.
