4.2.3TERMS OF TRADE

Question	Answer
Terms of trade definition	An index number which shows the value of a country's average export price, relative to their average import price.
Terms of trade measures:	The volume of imports a country can receive per unit of exports
What is captured in a country's terms of trade?	The relative price of imports and exports may have an impact on competitiveness and on a country's living standards.
Formula for terms of trade	Terms of trade = Index of export prices / Index of import prices x100
Example calculation with index price of x rising by 15% and index price of m rising by 20% +meaning of outcome of calculation:	TOT= (115/120)X100= 95.83 As TOT is below 100 it means that this country's TOT are worsening.
What would an improvement in a country's TOT mean?	The price of exports (x) would rise relatively faster than that of imports (m), as you'd need to sell less amount of x to purchase the same amount of m.
What does this suggest?	This suggests a possible improvement in living standards.

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	Created by Elena Kriki about 6 years ago