Download 4.1.4 Terms of trade student

Students should be able to:
 Calculate terms of trade
 Analyse the factors influencing a country’s
terms of trade
 Evaluate the impact of change in a
country’s terms of trade
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Terms of trade are the ratio of export prices to
import prices. It measures the rate of exchange of
one product for another when two countries trade
_________________ theory of comparative
advantage explains that if countries specialise in
the production of the good/service in which they
have a __________ advantage, then all countries
can move _________ their PPF and gain from
trade. How the gains from trade are distributed
depends on the terms of trade.
𝑖𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠
𝑖𝑛𝑑𝑒𝑥 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠
×100
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Index of terms of trade =
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It is measured using an index as it is calculated
from the weighted average of thousands of different
export and import prices
Why is weighting used?
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Calculate the index if, over a given period, the
index of export prices rises by 10% and the index of
import prices rises by 5%?
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When the terms of trade rise above 100 they are
said to be ___________ and when they fall below
100 they are said to be ___________
The terms of trade can also be expressed in terms
of the number 1, with figures _______ 1 indicating
an improvement , and those below 1 a worsening.
If a country's terms of trade improve, it means that
for every unit of exports sold it can buy ______ units
of imported goods.
• So potentially, a rise in the terms of trade creates a
benefit in terms of how many goods need to be
exported to buy a given amount of imports.
• Why might it also have a beneficial effect on
domestic cost-push inflation? (HINT: what does an
improvement indicate for import prices relative to
export prices?)
• However, why might countries suffer?
•
Label the countries
During the commodity price boom (2007 – 2013),
many resource-exporting developing countries
experienced increases in their terms of trade.
In other words, for the same physical quantity of
exports (copper, rubber, oil etc.) as before, they
could buy ______ consumer and capital goods from
abroad
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The UK's terms of trade have generally _______
over the last 20 years, indicating that exports price
have has been ________ relative to import prices.
This is partly caused by the fact that globalisation
has tended to have less impact on the export price
of UK invisibles, in comparison to its effect on the
price of its visible imports.
What is the danger of an improving terms of trade
for the balance of trade?
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A worsening terms of trade indicates that a country
has to export _______ to purchase a given quantity
of imports.
If import prices rise faster than export prices, the
terms of trade have ___________. A greater
volume of exports has to be sold to finance a given
amount of imported goods and services.
Why does this typically lead to a fall in the standard
of living?
The Prebisch-Singer hypothesis: over the long run
the price of primary goods e.g. _______ declines in
proportion to manufactured goods e.g. __________
• This has happened to many developing countries
given the general decline in commodity prices in
relation to the price of manufactured goods and so
their terms of trade have __________
• Why might it not be true?
•
Colour and label lines
Colour
hlines
The terms of trade for the EU has ______ relative to
developing countries since the financial crisis in 2009
The terms of trade fluctuate in line with changes
in export and import ________.
Which two rates can influence the direction of any
change in the terms of trade?
A key variable for many developing countries is
the world price received for primary commodity
exports e.g. the world export price for ________
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Improved terms of trade:
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If exports are price elastic then a rise in export
prices means a larger % fall in demand so current
account ____________ but terms of trade improve
If exports are price inelastic then a rise in export
prices means a smaller % fall in demand hence
both current account and terms of trade ________
Elastic imports and rise in import prices means
larger fall in demand, current account improves,
terms of trade __________
Inelastic imports, rise in import prices, both
____________