Measurement Of The Terms Of Trade
Economics notes
Measurement Of The Terms Of Trade
➡️ Exports are goods and services that are produced domestically and sold abroad. Imports are goods and services that are purchased from abroad. The terms of trade refer to the relative prices of exports and imports.
➡️ An increase in exports or a decrease in imports will lead to an improvement in the terms of trade, as the domestic currency will be able to purchase more foreign goods and services. Conversely, a decrease in exports or an increase in imports will lead to a deterioration in the terms of trade.
➡️ Changes in the terms of trade can have a significant impact on a country's economic performance, as it affects the amount of foreign currency that can be earned from exports and the cost of imports. This can lead to changes in the level of economic activity, employment, and inflation.
What is the terms of trade and how is it measured?
The terms of trade refers to the ratio of a country's export prices to its import prices. It is measured by dividing the price index of a country's exports by the price index of its imports. This ratio indicates whether a country is able to purchase more imports with the same amount of exports or vice versa.
How does a change in the terms of trade affect a country's economy?
A change in the terms of trade can have significant effects on a country's economy. If a country's terms of trade improve, meaning its export prices increase relative to its import prices, it can lead to an increase in its income and standard of living. On the other hand, if a country's terms of trade worsen, meaning its import prices increase relative to its export prices, it can lead to a decrease in its income and standard of living.
What factors can cause a change in a country's terms of trade?
Several factors can cause a change in a country's terms of trade, including changes in global demand for its exports, changes in global supply of its imports, changes in exchange rates, and changes in trade policies. For example, if a country's main export commodity experiences a surge in demand, its terms of trade may improve. Conversely, if a country's main import commodity experiences a shortage, its terms of trade may worsen.