Aims • Define Terms of trade (TOT) • Consequences of changes in TOT- (BoP & Domestic econ) • Significance for developing countries HL ONLY • Measurement of TOTCauses of changes in TOTPED for X and M
Define Terms of Trade • The amount of export goods needed to buy a set amount of imports. or • The ratio of export prices to import prices • X/M • (It is trade weighted)
It depends upon… • volume of goods traded, • prices • Exchange rates
Caveat • Improvements in TOT can be bad! • Be warned!
Consequences of an improvement in TOT • Price of exports rise COULD mean an improvement in the BofP. (Depends on PED) • Price of imports falls, COULD mean an improvement in the BofP. (Depends on PED) • Living standards rise as imports become relatively cheaper.
THINK! • Obviously the whole good/bad thing depends upon WHY the TOT have changed.
Consequences of a deterioration in TOT • Price of exports falls COULD mean an improvement in the BofP. (Depends on PED) • Price of imports rises, COULD mean an improvement in the BofP. (Depends on PED) • Higher priced imports may reduce living standards • Foreign debt repayment is relatively more expensive.
Developing countries • TOT is particularly serious for developing countries….
Why? I hear you ask • They are often dependent upon a narrow range of goods for income • These are usually Primary resources. • Any change in the price or demand for that will have huge impact on their BofP.
Why is the effect negative? • in supply of primary products • in synthetic substitutes • Protectionist agriculture policies in supply, which is dumped on world mkts, lowering prices • Miniaturisation of production in D
But it gets worse… • TOT deteriorate so need to sell more to buy imports. • to an in supply which leads to a in price. • High indebtedness means even more money is spent on debt repayment. • Has also led to environmental degradation.
Causes of changes in TOT: HL only SHORT RUN • Exchange rate • D for X • Protectionist policies • Inflation
Causes of changes in TOT: HL only • Successful supply side policies or in productivity would lower domestic prices • world supply can lead to gluts which drive down P • Y will change demand patterns