terms of trade Flashcards
defintion
an index which measures the relative price movement of imports and exports
calculation
export price index/import price index x100
what is the importance of the terms of trade?
the importance of the terms of trade index is that it provides a measure of the quantity of imports a country can obtain in exchange for a given volume of exports
what is the export price index and how is it calculated?
calculated using a basket go australias exports and assigning each export a weighting according to its importance (based on frequency of purchase)
average price of the basket is given an index number of 100 in the base year
if the average price of exports rise - index number will rise
what is the export price index calculation?
XPI (2) - XPI (1)/XPI (1) x100
what is the import price index calculation?
MPI (2) - MPI (1)/MPI (1) x100
what are the favourable movements in the TOT?
if XPI ↑ MPI ↓
XPI ↑ MPI stays the same
XPI ↓ less than MPI ↓
XPI ↑ more than MPI ↑
what are the unfavourable movements in the TOT?
XPI ↓ MPI ↑
XPI stays the same but MPI ↑
XPI ↑ less than MPI ↑
XPI ↓ more than MPI ↓
what are commodity prices?
the prices of commodities can be can be subject to wide fluctuations due to inelastic supply and demand
small shifts in demand and supply can cause large price swings
how does the TOT effect living standards?
a rise in the terms of trade means that countries can purchase more imports from a given quantity of exports but a fall in the terms of trade means that a country can now purchase less imports from a given quantity of exports
how does the TOT effect economic activity?
an increase in the terms of trade will lead to an expansion in economic activity
a decrease in the terms of trade will lead to a contraction in economic activity
how does the TOT effect government revenue?
an increase in the terms of trade will boost government revenue through income and company tax but a decrease in the terms of trade will decrease governments revenue
how does the TOT effect exchange rates?
a strong terms of trade will lead to an appreciation of the exchange rate but a decrease in the terms of trade will lead to a depreciation in the exchange rate
what is dutch disease?
the creation of a two speed economy
what happened to the TOT in 2001 - 2008?
the terms of trade increased from 70 to 106 in 2008 due to the mining boom
