Terms of trade.
Shows the relationship between the price of exports and
imports.
Terms of trade formula:
- This formula shows how expensive our exports are in
comparison to our imports.
Index of export prices *100
Index of import prices
- To calculate the index, you calculate it like the
CPI.
Improvement and deterioration.
Improvement:
, Deterioration:
Factors affecting a country’s term of trade:
4 factors:
Raw material prices:
Application - in 2008 there was a recession when oil
prices fell from $145.5 -> $32.
When prices decrease:
- Developing countries usually export raw materials.
They will see a deterioration in their terms of trade
as the cost of raw materials decreases.
- Developed countries usually import raw materials.
They will see an improvement in their terms of trade
as the cost of raw materials decreases.
Shows the relationship between the price of exports and
imports.
Terms of trade formula:
- This formula shows how expensive our exports are in
comparison to our imports.
Index of export prices *100
Index of import prices
- To calculate the index, you calculate it like the
CPI.
Improvement and deterioration.
Improvement:
, Deterioration:
Factors affecting a country’s term of trade:
4 factors:
Raw material prices:
Application - in 2008 there was a recession when oil
prices fell from $145.5 -> $32.
When prices decrease:
- Developing countries usually export raw materials.
They will see a deterioration in their terms of trade
as the cost of raw materials decreases.
- Developed countries usually import raw materials.
They will see an improvement in their terms of trade
as the cost of raw materials decreases.
