KK6

Terms of trade

is a ratio of the average prices received for Australian exports relative to the average prices paid for our imports and is measured using an index of export and import prices over a number of years

Measurement of the terms of trade

TOT favorability

• The TOT rise or become more favourable for a country when the export prices we receive rise faster, or fall less, than import prices. As a result, a nation can purchase more imports with a unit of its exports.

• The TOT is regarded as less favourable for a country when export prices rise more slowly, or fall more quickly, than import prices. As a result, a nation can purchase fewer imports with a given unit of its exports.

  

Causes of changes to the Terms of Trade (T0T)

• Changes in the level of demand for imports or exports (e.g. mining boom or pandemic)

Eg. If our trading partners are experiencing high Economic growth this can drive an increase in demand for exports leading to an increase in export prices resulting to a favorable movement in theTOT

• Changes to the exchange rate

Eg. If the AUD appreciates exports are worth more and imports are worth less leading to a favorable movement in the TOT

If the AUD depreciates exports are worth less and imports are worth more leading to a unfavorable movement in the TOT