Term of Trade Flashcards
(31 cards)
What is the Terms of Trade (ToT)?
An index that measures the ratio of export prices to import prices.
How is the Terms of Trade calculated?
ToT = (Export Price Index ÷ Import Price Index) × 100
What does an increase in the ToT mean?
A given quantity of exports buys more imports; it’s a favourable movement.
What does a decrease in the ToT mean?
A given quantity of exports buys fewer imports; it’s an unfavourable movement
What is the base year index value for both XPI and MPI?
100
If ToT > 100, is it favourable or unfavourable?
Favourable — export prices are relatively higher than import prices.
What happens if the Export Price Index rises more than the Import Price Index?
The Terms of Trade improve (favourable movement).
What is the main factor affecting Australia’s ToT?
Commodity prices, due to Australia’s heavy reliance on resource exports.
Why is the XPI more volatile than the MPI for Australia?
Because commodities have inelastic demand/supply and prices fluctuate more.
How did the Ukraine-Russia war affect Australia’s Terms of Trade (ToT) from 2016 to early 2022?
It reduced Ukraine’s agricultural exports, increasing global demand and prices for Australian agricultural goods like wheat and beef → increased XPI → increased ToT.
What was the impact of the collapse of Brazilian mines on Australia’s ToT?
It increased global demand for Australian iron ore and coal → raised export prices → increased XPI → improved ToT.
How did China’s economic growth affect Australia’s Terms of Trade?
Growth in China raised demand for Australian mining exports (e.g. iron ore, coal), which are inelastic → increased prices → increased XPI → increased ToT.
What was the effect of floods and droughts in Australia on its ToT?
Reduced agricultural output → higher prices for wheat and beef → increased export prices → increased XPI → increased ToT.
How did falling prices of imported manufactured goods affect Australia’s ToT?
Lower import prices → decreased MPI → improved ToT.
How did advances in ICT technology affect Australia’s import prices and ToT?
Technological advances reduced production costs of ICT goods → lowered import prices → decreased MPI → increased ToT
What caused a decline in ToT from mid-2022 onward?
Falling demand for Australian commodities (especially from China) → decreased prices → decreased XPI → decreased ToT.
How did LNG and coal prices post-COVID impact Australia’s ToT?
Supply outpaced demand → falling prices for LNG and coal → decreased XPI → decreased ToT.
How did the Russia-Ukraine war affect Australia’s MPI in 2023-24?
It led to higher oil prices → increased import costs → increased MPI → decreased ToT.
What effect did global inflation in 2023–2024 have on Australia’s Terms of Trade?
Increased prices of imported manufactures → increased MPI → decreased ToT.
How did supply bottlenecks affect Australia’s import prices and ToT?
Supply bottlenecks raised production costs → increased MPI → decreased ToT.
How does an increase in ToT affect the current account?
It increases the trade surplus if export and import volumes are inelastic → boosts XPI or lowers MPI → increases BoGS → decreases CAD.
How does a favourable ToT movement affect the exchange rate?
Higher export prices increase demand for AUD → appreciation of the exchange rate.
Who benefits and who is disadvantaged by an appreciating AUD due to ToT?
Consumers benefit from cheaper imports. Non-mining exporters suffer from reduced international competitiveness.
What is the “Dutch Disease” or two-speed economy in Australia?
High ToT benefits the mining sector but harms others like tourism and manufacturing due to high AUD → uneven economic growth.
