Terms Of trade

Question 1

What is the Terms Of Trade

Answer 1

The terms of trade is an index which measures the relative movements in the prices of exports and imports.

TOT = [Export Price Index ÷ Import Price index] × 100

Question 2

Why is it important

Answer 2

It is an important measure of our economic prosperity, and plays a significant role in the business cycle.

Question 3

Is a movement in the TOT favourable or unfavourable

Answer 3

A movement within the TOT is considered either favourable or unfavourable.

Year
Terms of Trade
Movement
1
100
N/A
2
95.5
Unfavourable
3
98.2
Favourable

Question 4

Australia’s TOT

Answer 4

Australia’s TOT
Our commodity prices are the main drivers of the TOT. China’s economy plays a major role in the TOT. An increase in commodity prices = Increase in TOT.

Question 5

What are the effects of the TOT

Answer 5

The TOT has important effects on

• The business cycle
• Output & Employment
• Trade and Current account balance
• The exchange rate
• The national income
• Investment.

Question 6

Australia pattern of TOT

Answer 6

Our Pattern of the TOT

• In 2011 we reached our peak during the mining boom
• Then an unfavourable movement from 2011 to 2016, signalling end of the boom
• From 2016 to 2019, there was a favourable movement by 35, due to a rise in commodity prices.
• 2020 then experience a global recession around the world, this led to an unfavourable movement in the TOT.
• 2021, the Australian economy bounced back post COVID-19 and led to a favourable movement in the TOT.