International Trade Part 2: Terms of Trade and Exchange Rates

These vocabulary flashcards cover key concepts of international trade including terms of trade calculations, foreign exchange market types, and different exchange rate regimes.

Terms of Trade

The rate at which one country’s products will be exchanged for the products of another.

Terms of Trade Index Formula

$$\frac{\text{Unit Price of Export}}{\text{Unit Price of Import}} \times 100$$

Favourable Terms of Trade

An increase in the terms of trade index above the base of $100$, often caused by an increase in export prices or a decrease in import prices.

Unfavourable Terms of Trade

A decline in the terms of trade index below the base of $100$, common in Caribbean countries due to product nature and demand elasticity.

Caribbean Primary Products

Key commodities exported by Caribbean countries, including rice, sugar, bananas, and bauxite, which are subject to world market price fluctuations.

Exchange Rate

The amount of one currency that must be sacrificed or exchanged to acquire another currency.

Foreign Exchange (FX) Market

A market that facilitates the transfer of purchasing power, provides credit for international transactions, and allows for hedging against risks.

Spot Market

A type of foreign exchange market where currency is bought or sold for exchange now in the present time.

Forward Market

A market where a contract is made at a rate agreed upon now for the purchase or sale of currency at an agreed future date.

Revaluation

An increase in the official value of a currency, specifically associated with a fixed exchange rate regime.

Appreciation

A change in a country’s currency rate where a unit buy more units of a foreign currency, associated with managed or floating regimes.

Devaluation

A reduction in the official value of a currency.

Depreciation

A change in a country’s currency rate where a unit buys fewer units of a foreign currency.

Flexible or Fluctuating Exchange Rate Regime

A system based on demand and supply flows where the exchange rate is allowed to vary up or down based on market forces.

Fixed Exchange Rate Regime

A regime fixed by law where the government intervenes by buying or selling its own currency to prevent appreciation or depreciation, used by countries like Barbados and Guyana.

Managed Float or Dirty Float Regime

A system where market forces set the rate, but the government intervenes within a set band to prevent large changes, used by countries like Jamaica, Haiti, and Dominica Republic.

Band

A specified range in a managed float regime that allows freedom of currency movement before the central bank intervenes.