Causes Of Changes In The Terms Of Trade
Economics notes
Causes Of Changes In The Terms Of Trade
➡️ The terms of trade measure the relative prices of a country's exports and imports.
➡️ It is calculated by dividing the index of export prices by the index of import prices.
➡️ A higher terms of trade indicates that a country is able to purchase more imports for the same amount of exports.
What are the main factors that cause changes in the terms of trade?
Changes in the terms of trade can be caused by a variety of factors, including changes in global demand for a country's exports, changes in the prices of a country's imports, changes in exchange rates, and changes in the productivity of a country's industries. Other factors that can affect the terms of trade include changes in government policies, such as tariffs and subsidies, and changes in the level of competition in international markets.
How do changes in the terms of trade affect a country's economy?
Changes in the terms of trade can have significant effects on a country's economy. If a country's terms of trade improve, meaning that the prices of its exports increase relative to the prices of its imports, the country will experience an increase in its real income and a boost to its economic growth. Conversely, if a country's terms of trade deteriorate, meaning that the prices of its exports decrease relative to the prices of its imports, the country will experience a decrease in its real income and a slowdown in its economic growth.
What strategies can a country use to improve its terms of trade?
There are several strategies that a country can use to improve its terms of trade. One strategy is to focus on increasing the productivity and competitiveness of its industries, which can help to increase the demand for its exports and improve the prices it can command in international markets. Another strategy is to diversify its export base, which can help to reduce its reliance on a small number of products and markets. Additionally, a country can use trade policies, such as tariffs and subsidies, to protect its domestic industries and promote its exports. Finally, a country can work to improve its infrastructure and reduce its trade barriers, which can help to increase the efficiency of its trade and improve its competitiveness in international markets.