1. Demands of the Question:

The demands of the question is that I write for 20 minutes without evaluating, because it is a paper 2 question. The question clearly states that you need to state 2 reasons for an improvement in the country’s terms of trade. You should include definitions, diagrams, and real world examples for each reason. “Explain” requires a student to take the concept and make it clear to someone else, stating the steps involved in reaching this understanding.

2. Definitions:

Terms of Trade: An index that shows the value of a country’s average export prices relative to their average import prices.

3. Triple A

• The terms of trade is expressed as the price relationship between a country’s imports and exports.
• The terms of trade is a measure of prices and so how it changes will be determined by demand and supply for the goods and services that are traded. If demand for exports grows significantly, then this is likely to boost export prices and lead to an improvement in the terms of trade.

• Many developing countries are very dependent on exports of primary commodities – minerals, agricultural commodities like coffee etc. If prices of these commodities on world markets fall then they face a deterioration in their terms of trade.
• An improvement in the terms of trade may improve the standard of living in a country – the same volume of exports will buy more imports.

• If the terms of trade has improved, then this means that export prices have increased more than import prices.
• This may indicate a deterioration in competitiveness and in the medium term may lead to a fall in export demand.
• How much export demand falls will depend on the price elasticity of demand for exports. This may adversely affect the balance of payments.

• For developing countries that are very dependent on a narrow range of primary exports, the terms of trade will be crucial to their ability to grow and to fund essential imports

4. Power Point Slides

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Diagrams

 

 

 

 

 

 

6. Answer:

Two reasons for an improvement in a country’s terms of trade can be seen in exports and imports. If demand for exports grows significantly, then this is likely to boost export prices and lead to an improvement in the terms of trade. Also, the ability to grow and to fund essential imports will improve the terms of trade.

historical decline in commodity prices

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