mrshearingeconomics
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  • AS level 2015
    • Induction day
    • Year 11 Induction
    • Theme 1 >
      • 1.1 Nature of economics >
        • 1.1.1 Economics as a social science
        • 1.1.2 Positive and normative economic statements
        • 1.1.3 The economic problem
        • 1.1.4 Production possibility frontiers
        • 1.1.5 Specialisation and the division of labour
        • 1.1.6 Free market economies, mixed economy and command economy
      • 1.2 How markets work >
        • 1.2.1 Rational decision making
        • 1.2.2 Demand
        • 1.2.3 Price, income and cross elasticities of demand
        • 1.2.4 Supply
        • 1.2.5 Elasticity of supply
        • 1.2.6 Price determination
        • 1.2.7 Price mechanism
        • 1.2.8 Consumer and producer surplus
        • 1.2.9 Indirect taxes and subsidies
        • 1.2.10 Alternative views of consumer behaviour
      • 1.3 Market failure >
        • 1.3.1 Types of market failure
        • 1.3.2 Externalities
        • 1.3.3 Public goods
        • 1.3.4 Information gaps
      • 1.4 Government intervention >
        • 1.4.1 Government intervention in markets
        • 1.4.2 Government failure
    • Theme 2 >
      • 2.1 Measures of economic performance >
        • 2.1.1 Economic growth
        • 2.1.2 Inflation
        • 2.1.3 Employment and unemployment
        • 2.1.4 Balance of payments
      • 2.2 Aggregate demand (AD) >
        • 2.2.1 The characteristics of AD
        • 2.2.2 Consumption (C)
        • 2.2.3 Investment (I)
        • 2.2.4 Government expenditure (G)
        • 2.2.5 Net trade (X-M)
      • 2.3 Aggregate supply (AS) >
        • 2.3.1 The characteristics of AS
      • 2.4 National income >
        • 2.4.1 National income
        • 2.4.3 Equilibrium levels of real national output
        • 2.4.4 The multiplier
      • 2.5 Economic growth >
        • 2.5.1 Causes of growth
        • 2.5.2 Output gaps
        • 2.5.3 Trade (business) cycle
      • 2.6 Macroeconomic objectives and policies >
        • 2.6.1 Possible macroeconomic objectives
        • 2.6.2 Demand-side policies
        • 2.6.3. Supply-side policies
        • 2.6.4 Conflicts and tradeoffs between objectives and policies
        • Financial Crisis v Great depression
      • Class 2016
  • A level 2016
    • Theme 3 >
      • 3.1. Business Growth >
        • 3.1.1 Sizes and types of firms
        • 3.1.2 Business growth
        • 3.1.3 Demergers
      • 3.2 Business Objectives >
        • 3.2.1 Business objectives
      • 3.3 Revenue, Costs & Profits >
        • 3.3.1 Revenue
        • 3.3.2 Costs
        • 3.3.3 Economies and diseconomies of scale
        • 3.3.4 Normal profits, supernormal profits & losses
      • 3.4 Market Structures >
        • 3.4.1 Efficiency
        • 3.4.2 Perfect competition
        • 3.4.3 Monopolistic competition
        • 3.4.4 Oligopoly
        • 3.4.5 Monopoly
        • 3.4.6 Monopsony
        • 3.4.7 Contestability
      • 3.5 Labour market >
        • 3.5.1 Demand for labour
        • 3.5.2 Supply of labour
        • 3.5.3 Wage determination in competitive and non-competitive markets
      • 3.6 Government intervention >
        • 3.6.1 Government intervention
        • 3.6.2 The impact of government intervention
    • Theme 4 >
      • 4.1 International economics >
        • 4.1.1 Globalisation
        • 4.1.2 Specialisation & Trade
        • 4.1.3 Pattern of trade
        • 4.1.4 Terms of trade
        • 4.1.5 Trading blocs & WTO
        • 4.1.6 Restrictions on free trade
        • 4.1.7 Balance of Payments
        • 4.1.8 Exchange Rates
        • 4.1.9 International Competiveness
      • 4.2 Poverty and inequality >
        • 4.2.1 Absolute & Relative Poverty
        • 4.2.2 Inequality
      • 4.3 Emerging and developing economies >
        • 4.3.1 Measures of development
        • 4.3.2 Factors influence growth & dev
        • 4.3.3 Stratergies for growth & dev
      • 4.4 The financial sector >
        • 4.4.1 Role financial markets
        • 4.4.2 MF in Financial markets
        • 4.4.3 Role of Central Banks
      • 4.5 Role of the state in the macroeconomy >
        • 4.5.1 Public expendicture
        • 4.5.2 Taxation
        • 4.5.3 Public sector finances
        • 4.5.4 Macro policies
  • Class List
    • Year 13
    • Year 12
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

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:
Terms of trade = Index of export prices x 100
                         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?

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. 
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?
Picture

Impact of changes in a country's terms of trade

Picture
http://www.stuff.co.nz/business/farming/dairy/70912048/Fonterra-revises-down-milk-price-to-3-85
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

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. 

Importance of TOT for development economics 

Prebisch-Singer Hypothesis
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​
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