4.1.4 Terms of trade

• What do the terms of trade measure?

  Export prices to import prices
• The terms of trade are calculated using the formula: \text{Terms of trade} = \frac{\text{Export Price Index}}{\text{Import Price Index}} \times 100
• Favorable terms of trade occur when the export price index increases relative to the import price index.
• Unfavorable terms of trade occur when the export price index decreases relative to the import price index
• What two indexes are used to calculate the terms of trade?

  Export Price Index and Import Price Index
• The Export Price Index measures the average price of a country's exports
• Calculate the terms of trade if the Export Price Index is 120 and the Import Price Index is 100.

  120
• A terms of trade value of 120 indicates favorable terms of trade.
• Match the terms of trade with their definitions:

  Favorable ↔️ Export prices increase relative to import prices

  Unfavorable ↔️ Export prices decrease relative to import prices
• What happens to the terms of trade when the export price index increases relative to the import price index?

  Favorable terms of trade
• If the Export Price Index is 120 and the Import Price Index is 100, the terms of trade are 120
• Order the factors affecting terms of trade based on their effect:

  1️⃣ Increase in Export Prices

  2️⃣ Decrease in Import Prices

  3️⃣ Appreciation of Domestic Currency

  4️⃣ Improved Productivity
• Favorable terms of trade lead to a positive balance of payments
• How do unfavorable terms of trade affect economic development?

  Hinder economic growth