Terms Of Trade

Question 1

Terms of trade

Answer 1

Ratio of export prices to import prices
Reflects how many imports can be bought with a given quality (basket) of exports

Question 2

Terms if trade index

Answer 2

Export price index / import price index x 100

Question 3

TOT improves if..

Answer 3

-export price index rises at a faster rate than import price index
-exports price index falls at a slower rate than import price index

Question 4

TOT deteriorates if..

Answer 4

-rise of import price index rises at a faster rate tham export price index
-import price index falls at a slower than exports price index

Question 5

Trends in TOT

Answer 5

-TOT has increasing trend 2014-2024
-mainly caused by increasing commodity prices, change in relative inflation rates (Aus inflation effects xpi, global effects mpi), changes in exchange rates
-imports are more expensive for Australians than 10 yrs ago but TOT has still had a favourable movement because XPI increased at a faster rate
-MPI has risen becuause Aus is sensitive to changes in price of oil which has had global shortagesm(main ingredient in refined petroleum and it raises the cost of all imports by decreasing cost of transport)

Question 6

Impacts of changes in TOT

Answer 6

Internal balance:
-increased real incomes and standard of living allowing more consumption without the need for more production
-increased incomes leads to increased econ growth decreased unemployment
External balance:
-increased balance of trade (as long as price elasticity is low for x and m)
-exchange rate (Aud is a commodity currency and commodity prices affect Tot)

Question 7

TOT key facts

Answer 7

-minerals and energy (mining sector) accounts for 60% of Aus exports
-commodities accounts for roughly 75% exports (including agricultural commodities)
-commodity prices have an increasing trend: increased trend bc of global business cycle (expansion), decreased supply (shortages) because wars and supply chain disruption (COVID)