Terms of Trade

what is terms of trade

relationship between price of exports and price of imports

ratio to export prices to import prices

how to workout terms of trade

1. Index of export prices , average price of most exported goods

2. Index of import prices , average price of most imported goods

3. rate of index - (index of export prices/ index of import prices) x 100

how is terms of trade improved

increase of index of exports

or decrease index of imports

how is terms of trade deteriorated

decrease index of exports

or

increase index of exports

factors influencing country’s terms of trade

1)Raw material prices

2) Tarrifs

3) exchange rates

4) inflation rate compared to other countries

how does decrease in cost in raw materials affect terms of trade

countries that export out , decrease index of exports , deuterate terms of trade

countries that import in , index of imports decrease , terms of trade improve

how does reduced or removal of tarrifs affect terms of trade

improvement on terms of trade

how does exchange rate affect terms of trade

strong pounds , SPICED , decrease index of imports and increase index of exports , terms of trade deuterate

how does low inflation rate in trading partners affect terms of trade

deteriorate terms of trade

impact of terms of trade

1. decrease of terms of trade , decrease in exports , decrease in living standards

2. decrease terms of trade , decrease export price , UK products more price competitive , increase competitiveness , increase exports

   • increase exports , increase AD , increase real GDP

   • increase exports , increase AD , increase derived demand for labor , increase employment

   • increase exports m increase export revenue , improve current account deficit