4.1.4 - terms of trade

what is the terms of trade

the ratio of a country’s average price of exports to the country’s average price of imports

what does terms of trade have a direct impact on

STANDARD OF LIVING:

exports expensive = higher incomes = imports cheap

what’s the formula for terms of trad

(exports index/imports index) x 100

uses a weighted basket of imports + exports

possible things a change in the terms of trade could impact

balance of payments

GDP

unemployment

international competitiveness

disposable income

living standards

key evaluation for terms of trade

DEPENDS on ped for exports and imports

price inelastic outcome if export price rises

economy benefits (people don’t stop buying exports)

same vice versa

price inelastic outcome if import price falls

economy loses out (people keep buying more expensive imports)

same vice versa