Terms of Trade Analysis

Question 1

erms of Trade (TOT) Analysis — Key Points

Answer 1

TOT Improvement means export prices rise relative to import prices, increasing revenue from exports if quantities stay constant or rise.

Question 2

Price Elasticity of Demand for Exports (XD):

Answer 2

If XD is elastic (>1): A price rise leads to a proportionally larger drop in quantity demanded → export revenue might fall despite higher prices.

If XD is inelastic (<1): A price rise leads to a smaller drop in quantity demanded → export revenue increases.

Question 3

Relative Inflation:

Answer 3

Inflation affects export and import prices differently, which changes the TOT.

Question 4

International Competitiveness:

Answer 4

Even if prices rise, competitiveness depends on quality, innovation, and productivity.

If competitiveness drops, export quantities may fall.

Question 5

Quantities of Exports and Imports (X&M):

Answer 5

TOT changes affect quantities traded, which impact the Current Account (CA) and Aggregate Demand (AD).