Terms of trade

• What does the terms of trade measure?

  The relationship between export and import prices
• According to the equation, what is multiplied by 100 to calculate the terms of trade?

  Weighted average of export prices over import prices
• In the equation for terms of trade, what does the numerator represent?

  Weighted average of export prices
• What does the denominator in the terms of trade equation represent?

  Weighted average of import prices
• What is the significance of the terms of trade equation?

  It measures relative export and import prices
• What does the video compare the calculation of the terms of trade to?

  The calculation of the CPI index
• In the basket of exports, how are the individual exports weighted?

  According to the revenues they bring in
• What happens after the weighted average price of exports is calculated?

  It is placed in the numerator
• How are imports weighted in the 'basket of imports' used to calculate the terms of trade?

  Based on the expenditure on those imports
• What form are the terms of trade numbers put into after being calculated?

  Index form
• What value does the base year have in terms of trade index calculations?

  100
• What is done with the new terms of trade figure each year?

  Compared back to the base year
• What does the terms of trade tell a nation?

  Exports to sell to purchase a given level of imports
• Why is the terms of trade concept particularly significant for developing countries?

  They rely on export revenues to purchase imports
• What does an improvement in the terms of trade indicate?

  Basket of exports can buy more imports
• What does a deterioration in the terms of trade imply?

  Basket of exports buys fewer imports
• If the terms of trade index goes from 100 to 102, what does this mean?

  Exports can buy 2% more imports
• What could cause the terms of trade to improve?

  Export prices increase or import prices decrease
• If the terms of trade goes from 102 to 101, what does this mean?

  A deterioration compared to year two
• How does a terms of trade index of 101 compare to a base year of 100?

  Still an improvement
• What could cause a deterioration in the terms of trade between year 2 and year 3?

  Export prices decreased or import prices increased
• For a developing nation, what does a deterioration in the terms of trade mean in terms of trade volumes?

  Sell more exports to buy same imports
• What are the two broad categories of factors that can change the terms of trade?

  Short run and long run factors
• How do changes in tastes and fashion impact the terms of trade?

  By altering demand for exports
• How can weather conditions impact the terms of trade?

  Affecting the supply of exports and imports
• How can relative inflation rates impact the terms of trade?

  Push up the price of exports
• How do changes in exchange rates affect the terms of trade?

  Affecting export and import prices
• How do income changes in developed countries affect developing countries that export primary commodities?

  Lead to long-term deterioration
• Why does increased income in developed nations impact developing nations' terms of trade?

  Demand for commodities is income inelastic
• What is the name of the hypothesis related to income changes and terms of trade?

  Prebisch-Singer hypothesis
• How can improvements in productivity and technology affect the terms of trade?

  Lead to a deterioration
• Why do productivity and technology improvements often lead to a deterioration in the terms of trade?

  Lower the cost of production