TERMS OF TRADE

• Absolute Advantage
• Exports


  Sale of goods & services abroad
• Comparative Advantage

  • Ability to produce a product at a lower opportunity cost than another country (in comparison)
• Even when one of the countries is more efficient at producing all products
• Causes of Changes in Terms of Trade

  • Globalisation
  • Economic Development
  • Price Elasticity of Demand
  • Exchange Rate
  • Protectionist Measures
  • Population Growth
  • Competition
• Fall in Index

  Deterioration in the Terms of Trade -> Less imports can be purchased with the given amount of exports
• Calculation of Terms of Trade

  Terms of Trade = (Index of Export Prices) / (Index of Import Prices) * 100
• Terms of Trade

  Ratio of a country’s export prices to import prices
• Absolute Advantage


  • Ability to produce more of a product than another country, with the same amount of resources
• International Trade

  Makes it possible for all countries to benefit from other countries’ comparative advantages
• Benefits of Free Trade

  • Lower Overall Price
  • Greater Choice of Goods for Consumers
  • Firms benefit from Economies of Scale
  • Increased Exports
  • Specialisation -> Countries gain an increase in economic welfare
• Imports

  Purchase of goods & services from abroad
• Rise in Index

  Improvement in the Terms of Trade -> More imports can be purchased with the given amount of exports
• Impact of Changes in Terms of Trade

  • Trade Balance
  • Developing Countries
  • Price Competitiveness
• DEFINE ABSOLUTE ADVANTAGE

  Ability to produce more of a product than another country, using same amount of resources