ILO:
a) Calculation of terms of trade
b) Factors influencing a country's terms of trade
c) Impact of changes in a country's terms of trade
a) Calculation of terms of trade
b) Factors influencing a country's terms of trade
c) Impact of changes in a country's terms of trade
Terms of trade
The relative prices of imports and exports may have an important impact on competitiveness and on a country’s living standards. These are captured in a country’s terms of trade.
Def:
An index number which shows the value of a country's average export price, relative to their average import price.
Formula:
Def:
An index number which shows the value of a country's average export price, relative to their average import price.
Formula:
Terms of trade = Index of export prices x 100
Index of import prices
Index of import prices
Using 2013 as the base year calculate the index number for both X & M
Then calulate the terms of trade for each year
How would you describe what has happened?
Is this a good or bad thing in your opininon? Why?
Then calulate the terms of trade for each year
How would you describe what has happened?
Is this a good or bad thing in your opininon? Why?
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X average price per unit £1.23 in 2010
X average price per unit £1.33 in 2011 X average price per unit £1.43 in 2012 X average price per unit £1.50 in 2013 X average price per unit £1.53 in 2014 X average price per unit £1.81 in 2015 |
M average price per unit £0.23 in 2010
M average price per unit £0.33 in 2011 M average price per unit £0.43 in 2012 M average price per unit £0.51 in 2013 M average price per unit £0.53 in 2014 M average price per unit £0.55 in 2015 |
Factors influencing a country’s terms of trade
An improvement in your TOT would mean that the price of your X would rise relatively faster than M, as you'd need to sell less X to purchase the same amount of M. Suggesting a possible improvement in your standard of living.
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How do you think the following would each influence the TOT:
> Relative inflation rates > Relative productivity rates > Changes in exchange rates How might Brexit influence the UK's TOT? What might that mean for the countries in the graph? |
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Impact of changes in a country's terms of trade
http://www.stuff.co.nz/business/farming/dairy/70912048/Fonterra-revises-down-milk-price-to-3-85
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Consider the following video on the following questions:
How has the price of milk changed? What has this meant for firms? How could this of influnced New Zelands TOT? Assess what might this mean for the economy? New Zealand dairy sector sours as milk boom ends I FT World Notebook
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Changes in a country’s terms of trade impact on living standards and on the competitiveness of a country’s goods and services, with implications for the balance of payments on current account, output and employment. For example, an improvement (increase in) a country’s terms of trade implies an increase in its living standards because less has to be exported to buy a given quantity of imports.
However, it could mean that the country’s goods and services are less competitive and so result in a deterioration in the current account, lower output and higher unemployment.
It's important to understand the PED of the X & M for a given country when considering the TOT, as the overall impact on X & M revenue streams will be determined by now demand responds to the changes in prices that you're measuring.
However, it could mean that the country’s goods and services are less competitive and so result in a deterioration in the current account, lower output and higher unemployment.
It's important to understand the PED of the X & M for a given country when considering the TOT, as the overall impact on X & M revenue streams will be determined by now demand responds to the changes in prices that you're measuring.
Importance of TOT for development economics
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Prebisch-Singer Hypothesis
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Answer the following questions based upon the video:
What is meant by Prebisch-Singer Hypothesis? Why is it related to growth and development in some LDC based upon what you've studies so far? What alternatives would you suggest to support growth and development? Additional reading: http://www.economicsonline.co.uk/Global_economics/Policies_to_promote_development.html |
