terms-of-trade

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The Terms of Trade

Terms of trade refer to the ratio of a country’s average price of exports to the country’s average price of imports
The relative price of imports and exports can have a direct bearing on the standard of living within a country
- Exporting goods which are highly priced results in higher incomes and the ability to buy cheaper imports
- The terms of trade capture the relationship between the average prices of a country’s exports and imports

Calculation of the terms of trade

$Terms space of space trade space equals fraction numerator Index space of space average space export space prices over denominator Index space of space average space import space prices end fraction space cross times space 100$
The index for exports and imports is created in much the same way that a consumer price index is created (using a weighted basket of imports and exports)

Worked Example

Calculate the terms of trade for Country X. State if the terms of trade have improved or worsened. In the final column explain what that means for country X

Year	Index of average export prices	Index of average import prices
2012	100	100
2013	100	107
2014	112	108
2015	115	110

Step 1: Identify the index year as this is the base year and complete calculations for the index year
The index year will be the year in which both the index for export and import prices is 100

Year	Index of average export prices	Index of average import prices	Calculation of terms of trade	Terms of trade	Improvement or deterioration?	Explanation
2012	100	100	$100 over 100 cross times 100 space equals space$	100	Base year	Both export and import index = 100
2013	100	107
2014	112	107
2015	115	110

Step 2: Calculate the terms of trade for each year and state if they have improved/deteriorated

Year	Index of average export prices	Index of average import prices	Calculation of terms of trade	Terms of trade	Improvement or deterioration?	Explanation
2012	100	100	<img alt=”100 over 100 cross times 100 space equals space” data-mathml='<math style=”font-family:Arial” ><semantics><mstyle mathsize=”14px”><mfrac ><mn>100</mn><mn>100</mn></mfrac><mo >×</mo><mn >100</mn><mo > </mo><mo >=</mo><mo > </mo></mstyle><annotation encoding=”application/vnd.wiris.mtweb-params+json”>{“language”:”en”,”fontFamily”:”Times New Roman”,”fontSize”:”18″}</annotation></semantics></math>’ height=”37″ role=”math” src=”data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20xmlns%3Awrs%3D%22http%3A%2F%2Fwww.wiris.com%2Fxml%2Fmathml-extension%22%20height%3D%2237%22%20width%3D%2293%22%20wrs%3Abaseline%3D%2223%22%3E%3C!–MathML%3A%20%3Cmath%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F1998%2FMath%2FMathML%22%20style%3D%22font-family%3AArial%22%3E%3Cmstyle%20mathsize%3D%2214px%22%3E%3Cmfrac%20mathcolor%3D%22%23000000%22%3E%3Cmn%3E100%3C%2Fmn

Economics_A-level_Edexcel

terms-of-trade

The Terms of Trade

Calculation of the terms of trade

Worked Example

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