4.1.4

What is the terms of trade?

the relative price of its exports compared to its imports i.e. its rates of exchange (amount of exports it can buy per unit of imports)

How is the terms of trade calculated?

(index of export prices)/(index of import prices) X 100

When will the TOT increase?

If the price of a country's export rises faster than the import prices

What does it mean if the TOT index falls?

The country is effectively worse off

How would a stronger exchange rate affect the TOT?

TOT will increase, M are cheaper, X more expensive

How would a rise in foreign countries' protectionist policies affect the TOT?

TOT will increase, more costly to export. Although, the opposite could have if X prices fall. It depends.

How would lower inflation than foreign inflation affect the TOT?

Fall in TOT, M prices rise compared to X prices. However, it could rise because X prices rise, it depends on how much is imported.

What are 5 factors affecting the Terms of Trade?

relative inflation rates, changes in raw material prices, changes in exchange rate, size of tariffs, dependency on primary products

What is the Prebisch-Singer (P-S) Hypothesis?

A country that exports commodities will be able to import less and less for a given level of exports. This is because YED for manufactured goods rises more rapidly than for primary goods. Therefore as income rises, demand for manufactured goods rises relative to demand for primary goods. Therefore, the prices of manu. goods rise relative to primary goods.

What is the impact of a country's TOT on living standards?

If improvement in ToT, implies there could be a fall in GDP and rise in u/e OR since more import can be bought for exports, could lead to improvement (depends on competitiveness of exports)

How does a fall in TOT affect inflation?

Higher inflation if the fall was caused by an increase in price of imported raw materials

What is the impact of TOT on developing economies?

Natural resource curse as ownership of minerals/fuels causes an appreciation of exchange rates and therefore ToT - loss of competitiveness - less economic growth

How does an upward movement of ToT affect the BoP on CA?

Decrease the competitiveness of goods and services. Depends on elasticities of M/X.