IB Econ Chap 26 Terms of Trade - Sunny Hills High School

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26 o Terms of trade
Year I
Year 2
Year 3
Year 4
Year 5
Year 6
r00
r02
106
I0
108
106
Table 26.1 Terms of trade igures
i00
100
104
110
r06
r08
ffixroo
ffixroo
r06
104
|0..
I t0 "
t08 ..
l(lt)
x 100
import prices is relatively more great and so the TOT value falls a
little Lo 101.92. We say that there has been a detedoration in the
TOT, which means LhaL a givcn amount of cxports can buy fewer
imports than in year 2. However, the TOT in year 3 are still better
than in year l. In year 4, import prices dse by relatively more than
export prices and so the value of the TOT falls again, back to 100. So
in year 4 a given amount of exports will buy the samc amounL of
impofis as in year I. In year 5 export pdces fall but import priccs fall
by more, whicb this lcads to an improvement in the TOT and the
value rises to I0I.89.
We can sce from the example that if export pdces rise relative to
import prices, or if they lall by relatively less than imporL prices fall,
lhen the TOT will improve. In the same way, if import prices dse by
more than export prices. or iI rhey fall by relatively less than exporl
prices fall, then the TOT will dctcriorate.
The key thing to realize is that if the TOT improve, then a given
quantity of cxports will buy a larger quantity of imports than bcfore.
We often talk about a "basket" of exports, in the same way as
mcasuring inflation. I1 the price of a basket of exports lalls, Lhcn a
country will need to sell more exports in order to kccp imporLs at the
same level.
Student workpoint 26.1
Be a thinker
I Using the data in Table 26.1 , calculate the TOT for year 6.
2 Describe the changes !n the TOT from year 5. What does this mean
about the "buying power" of the country's exports?
5 How does the buying power of the country's exports in year 6
compare with year I ?
Asses$nent odviae: ln HL paper 3, you may be asked to calculate the terms of
trade as in workpoint 26.1 .
r00
100
r00
102
t0r.92
100
101.89
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