4.1.4 Terms Of Trade

Question 1

What is the formula of index of terms of trade?

Answer 1

Index of export prices
______________________. Times 100

Index of import prices

Question 2

When can ToT improve?

Answer 2

• it said to improve when its value increases eg: when export prices rise relative to import prices

Question 3

When can cause ToT to deteriorate?

Answer 3

• when the value decreases eg: when exports prices fall relative to import prices

Question 4

What are short term factors which influence the terms of trade?

Answer 4

• exchange rates : if exchanges rise = improvement in ToT due to fall in price of imports
• inflation
• demand

Question 5

What are long term factors influencing the terms of trade?

Answer 5

• productivity = a rise in productivity can lead to a deterioration in the ToT
• income = increase in Y = demand increase = ToT improve