1
Q
what is the terms of trade?
A
relatiev price of exports to imports in an economy
2
Q
what is the formula for terms of trade?
A
(index of export price)/ (index of import prices) X 100
3
Q
what arae some reasons as to why terms in trade may improve?
A
- specialisation in higher value exports (manufacturing)
- exchnage rate appreciation, casuing import prices to fall
- trade deals lowering import prices
4
Q
what are reasons as to why the terms of trade might worsen?
A
- technological advanaces: reducing the cost of production and export prices
- world income levels
- imposition of tarrifs, increasing import prices
- depeciation of exchnage rate, increasing imprt prices
- increase in countries producing same good which decreases world price of exports
5
Q
what is the implication of a deteriation in the terms of tarade?
A
- a fall meas that a country must export more goods and services to maintain the same level of imports- this may cause living standards to fall
- higher import prices can cause cost-pull inflation
- a deprecaition in exchnage rate (cheaper exports) can lead to an improvement in price competitivness of exprorts
- worsening of trade balance and lower tax revenues
6
Q
explain two economic effect of an improvement in the terms of trade
chains of analysis
A
- if terms of trade have improved becuase of higher prices in for a country’s main export, this may stimulate an expansion of GDP growth through increased exports and investment. For example, exporters of iron ore from Austrailia will make super normal profits when the world price has risen. This may lead to a positive accelerator effect on investment.
- the terms of trade may have also improved becuase of a fall in import tarrifs, which ceteris paribus causes the domestic price of imports to drop. A possible effects of lower import prices is less cost push inflation which lifts the profits of businesses such as car makers who import many component parts.
