Terms of Trade

Question 1

Formula:

Answer 1

TOT=
Weightedaverageexportprices
Weightedaverageimport prices ×100

Question 2

Example index:`

Answer 2

Year 1 = 100

Year 2 = 102 (TOT improved)

Year 3 = 98 (TOT worsened)

Question 3

Factors that Change TOT: Demand/Supply of Exports and Imports

Answer 3

Changes in demand or supply for exports/imports affect their prices.

Example: Weather impacts agricultural exports—good weather boosts supply, bad weather reduces it, affecting prices.

Question 4

Factors that Change TOT: Relative Inflation Rates

Answer 4

If a country’s inflation is higher, export prices may rise, but the country may become less competitive internationally.

Question 5

Factors that Change TOT: Exchange Rate Movements

Answer 5

Changes in exchange rates affect the prices of imports and exports, influencing the TOT.

Question 6

Factors that Change TOT : Long-run Changes in TOT:

Answer 6

Income changes:

In developing countries that export primary commodities, if their incomes rise, export prices may not increase as fast as import prices, worsening TOT.

Developed countries exporting manufactured goods might see improvements in TOT due to productivity gains.

Technology:

Improvements can lower production costs and prices, affecting export competitiveness and TOT.