4.1.4 Terms Of Trade

Question 1

4.1.4a
Define Terms for Trade

Answer 1

Measures a country’s export prices in relation to import prices

Question 2

4.1.4a
Calculation for Terms of Trade

Answer 2

( Index of Exports / Index of Imports ) x 100

Question 3

4.1.4a
Improving Terms of Trade

Answer 3

Tot > 100

Question 4

4.1.4a
Worsening Terms of Trade

Answer 4

Tot < 100

Question 5

4.1.4b
Factors Influencing Terms of Trade

Answer 5

• Exchange Rates
• World Demand
• Inflation
• Productivity
• Commodity Dependancy

Question 6

4.1.4b
Exchange Rates

Answer 6

Appreciation (stronger currency) = SPICED = exports dearer, imports cheaper = export prices ↑ / import prices ↓ = ToT improves, but net exports ↓
IF
PED is elastic → trade balance worsens AS export demand ↓

Question 7

4.1.4b
Inflation

Answer 7

• If UK inflation ↑ = export prices ↑ = ToT improves (numerator rises)
  BUT
  exports less competitive = export volume ↓ = trade balance worsens
• If other countries’ inflation ↑ = UK import prices ↑ → ToT worsens
  = UK can buy fewer goods per unit of export.

Question 8

4.1.4b
World Demand

Answer 8

• Foreign incomes ↑ = ↑ demand for UK exports = export prices ↑ (if inelastic supply) = ToT improves
• net exports ↑ = GDP ↑

Question 9

4.1.4b
Productivity

Answer 9

• UK productivity ↑ = production costs ↓ = export prices ↓ = ToT worsens, but competitiveness ↑ = export volume ↑ = GDP and employment ↑ = possible net benefit
• Foreign productivity ↑ = import prices ↓ = ToT improves, but increased import demand = trade deficit risk.

Question 10

4.1.4b
Commodity Dependancy

Answer 10

• Countries reliant on commodities (e.g. oil, copper) → volatile ToT
  • Price boom → ToT improves
  • Price crash → ToT worsens drastically
  = risk of external shocks for PPD countries.

Question 11

4.1.4c
Improving ToT

Answer 11

Export price ↑ = Terms of trade ↑ = more money per unit = ↑Living standards , PP ↑ = buy more imports for same volume of exports
BUT
exports are elastic = quantity sold ↓ = total revenue ↓ = trade balance worsens = job losses = living standards ↓

Question 12

4.1.4c
Worsening ToT

Answer 12

• More exports needed to afford the same imports = purchasing power ↓ = living standards ↓ + cost-push inflation risk
• Especially bad if import prices ↑ → raw material costs ↑ = SRAS shifts left = inflation ↑ + GDP ↓