Terms of trade

What do the terms of trade (ToT) measure?

The terms of trade measure the relative prices of a country's exports compared to the cost (prices) of imported goods and services.

How does an increase in the terms of trade affect a country's economy?

An increase in the terms of trade means that there has been an increase in the average price of exported products in relation to imported, which can benefit the country's economy.

What happens if a country's export prices increase less than import prices?

It results in a deterioration of the country's terms of trade, potentially leading to trade deficits and challenges for export industries.

How does a change in the exchange rate affect a country's terms of trade?

An appreciation of the exchange rate can improve the terms of trade, while depreciation can have the opposite effect.

How does relative inflation impact a country's terms of trade?

If a country's domestic inflation accelerates relative to its trading partners, its export prices will rise faster than import prices, leading to an improvement in the terms of trade.

What role do changes in demand and supply play in terms of trade fluctuations?

Global patterns of demand and supply influence the prices of internationally traded goods and services, with primary products experiencing greater fluctuations.

How does relative productivity affect a country's terms of trade?

A faster rate of productivity growth in a country can lead to falling costs of production, resulting in a worsening of the terms of trade.

What is a Free Trade Area, and how does it promote efficiency?

A Free Trade Area allows countries to trade goods without barriers and promotes efficiency by leveraging their comparative advantages.

What is the role of the World Trade Organization in international trade?

The WTO administers trade agreements, facilitates negotiations, resolves disputes, monitors global trade, assists developing countries, and collaborates with other international organizations.

What are some challenges in the relationship between Regional Trade Agreements and the WTO?

Challenges include the distortion of global trade, protectionism conflicts, difficulties for developing countries, and concerns about equality in trade practices.

What is protectionism in the context of international trade?

Protectionism involves safeguarding a country's industries from foreign competition through trade restrictions.

How does protecting infant industries relate to protectionism?

Protectionism can be used to support new and developing industries until they become self-sustainable.

What is one reason for using protectionism to correct market failure?

Protectionism can address issues related to demerit goods and protect society from their negative effects.

What is retaliation in the context of trade restrictions?

Some countries may impose trade restrictions as retaliation against trade barriers imposed by other countries.

What are typed of restrictions on trade?

• Tariffs: Taxes on imports that increase their prices.

• Quotas: Limits on foreign goods that raise domestic prices.

• Subsidies to Domestic Producers: Government support for local industries to make their products cheaper.

• Non-tariff Barriers: Various non-tax obstacles to trade — Voluntary Export Restraints (VERs), embargoes, and excessive administrative burdens.