Terms of Trade

• What are the terms of trade?

  Ratio of a country's average price of exports to the average price of imports
• Why are terms of trade significant?

  They have a direct influence on a country's standard of living

  • Exporting highly-priced goods results in higher incomes and cheaper imports
• How are terms of trade calculated?

  Terms of trade are calculated by dividing the price index of a country's exports by the price index of its imports and multiplying by 100.
• What factors influence a country's terms of trade?

  • Inflation rates
  • Productivity rates
  • Exchange rates
• How do inflation rates influence a country's terms of trade?

  • Dependant on the elasticity of the product
  • Elastic goods will worsen the terms of trade
  • Inelastic goods will improve the terms of trade
• How do productivity rates influence a country's terms of trade?

  • Rate influences costs and thus prices
• How do exchange rates influence the pattern of trade?

  A change in price results in change in terms of trade
• Where do terms of trade have a large impact that it influences change?

  • Current account balance on BoP
  • GDP
  • Unemployment levels
  • Standards of living
• PED

  Investigate, if appears on unit questions