4.1.4 Terms of trade

Question 1

What is the terms of trade index

Answer 1

It looks at the relationship between price received for exports and the amount of imports we could buy with that amount of money

Question 2

Whats the equation for terms of trade

Answer 2

Index of export prices / Index of import prices x100

Question 3

What is Worsening of terms of trade

Answer 3

When a country has to export more to buy a given basket of g/s, e.g when export prices fall or import prices increase

Question 3

What is improving terms of trade

Answer 3

when a country doesn’t have export as much to buy g/s e.g is import prices fall or export prices rise

Question 7

What are the short run influences on a countries terms of trade

Answer 7

Changes in demand and supply of exports and imports
Relative inflation rates
Exchange rates

Question 8

What are the long run influences on a countries terms of trade

Answer 8

Income changes
Productivity improvements

Question 9

What is the Marshall Lerner condition

Answer 9

The combined PED of exports and imports must be greater than 1 otherwise a change in the terms of trade will have the opposite effects, e.g the increased price of imports will reduce quantity and revenue if demand is elastic

Question 10

What is the impact of terms of trade on the balance of payments

Answer 10

Increasing export revenue and decreasing import revenue will improve the current account balance
Decreasing export revenue and increasing import revenue will deteriorate the current account balance

Question 11

Explain the J curve

Answer 11

When there is a depreciation of currency there will be a time lag before having positive effects on the CA and have short term damage as quantity of imports and exports will not adjust immediately

Question 12

Explain the upside down J curve

Answer 12

An appreciation of the currency will be positive in short run and damaging to CA in long run

Question 13

What are the benefits of improving terms of trade for domestic economies

Answer 13

Allows more imports for the same price which may improve living standards
Moderates inflation as costs of production are cheaper

Question 14

What are the costs of improving terms of trade for domestic economies

Answer 14

If Marshal- Lerner condition met may cause trade deficit
May cause unemployment and falling output

Question 15

What is the Prebisch Singer Hypothesis