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Flashcards in Terms Of Trade Deck (12)
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What is terms of trade?

The ratio between the average export price and import price


What is the terms of trade in an equation?

Price index of exports/ price index of imports X 100


An improvement in the terms of trade means price of exports does what compared to imports?



A deterioration in the terms of trade means that the price of imports does what relative to exports?



Factors influencing the terms of trade? (5)

1. Exchange rate
2. Commodity prices
3. Higher inflation
4. Demand for goods
5. Globalisation


How do the exchange rates effect the terms of trade?

A depreciation makes exports cheaper which leads to a deterioration in the terms of trade


How to commodity prices influence the terms of trade?

If a country produces only primary products then a decrease in price worsens the terms of trade


How does higher inflation influence the terms of trade?

It increase in the price of exports and improves the terms of trade however if inflation is too high it will lead to a depreciation of the pound


How does the demand for good influence the terms of trade?

If demand increases for products it will lead to an increase in export demand and price improving the terms of trade


How does globalisation influence the terms of trade?

An increase in demand for exports from countries has improved the terms of trade for developing countries


Effect of a deterioration in the terms of trade (5)

1. Import prices are rising faster than exports
2. Countries need to export more to catch up with import
3. Higher import prices and cost push inflation
4. Long term could lead to lower standard of living because it can't afford so many imports
5. Can be beneficial, as if demand is elastic the value of exports increase thus growth increases and better balance of payment


Evaluation of it (3)

1. Depends on long term or short term. Long term can lead to lower living standards
2. If a country has an overvalued exchange rate and decrease in terms of trade can boost economic growth and competitiveness
3. Depends on elasticity of demand for exports. If inelastic a deterioration will not improve the BofP