4.1.4-Terms of Trade

terms of trade definition

measures the rate of exchange of one product for another when two countries trade

tells us the quantity of exports that need to be sold to purchase a given number of imports

terms of trade calculation

(average export price index/average import price index ) x100

factors influencing a countries terms of trade

anything that affects price of exports or imports, e.g.:
exchange rates

inflation rate

changing incomes

changes in relative productivity

impacts of changes in terms of trade

current account- if ped of exports and imports are ineleatic then improvement in terms of trade improves current account position on balance of payments (vice versa if elastic)

fall in gdp- improvement means rise in export prices so fall in ad, fall in output

unemployment- fall in derived demand for labour as exports more dear

long-term decline in terms of trade suggests a long term decline in living standards as fewer imports can be bought

improvements and deteriations will only be beneficial if export revenue rises as a result