Trade and Globalisation - L4 Terms of Trade Flashcards
What is the terms of trade.
Terms of Trade (ToT) is a ratio that measures the average prices received for Australian exports relative to the average prices paid for our imports.
What will happen to living standards if the price of Australia’s exports declines while the price of imports increases?
Living standards will fall/decrease due to a deterioration in the ToT.
What will happen to living standards if Australia’s exports become more expensive, while the price of imports becomes cheaper?
Living standards will rise/increase due to an improvement in the ToT
How do you calculate the Terms of Trade index?
Divide the Export price index by the import price index and multiply this number by 100
The recent fall in commodity prices has resulted in an unfavourable movement in Australia’s Terms of Trade because …
Australia’s key exports are commodities, with the top two exports being Iron Ore and Coal. When the prices of these commodities decreases, the terms of trade, a measure of the price of exports relative to the price of imports, moves in an unfavourable direction.
A favourable movement in Australia’s Terms of Trade is likely to result in an increase in economic growth because …
this indicates that as a nation, we are receiving higher prices for our exports relative (or compared to) our imports which leads to an increase in national income in the form of higher disposable incomes for workers and higher profits for producers (particularly in the mining sector).
This will result in an increase in private consumption expenditure (C) as households spend their disposable income and an increase in private investment expenditure (I) as business re-invest their retained profits into the business, both increasing aggregate demand.
Producers increase production, leading to higher levels of economic activity and growth, boosting jobs in the Australian economy but creating demand inflationary pressures.
A decrease in Australia’s Terms of Trade is likely to result in an increase in unemployment in the Australian economy because …
this indicates that as a nation we are receiving lower prices for our exports relative or compared to our imports which will lead to a decrease in national income in the form of lower profits for producers and less disposable income for workers (particularly in the mining sector).
This is likely to result in a decrease in private consumption expenditure (C) as households have less disposable income to spend and a decrease in private investment expenditure (I) as business have less retained profits to reinvest the business, both decreasing aggregate demand.
Producers reduce production, leading to lower levels of economic activity and growth, and less jobs in the Australian economy.
