Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 23: Problem 1

Write a short note on the terms of trade.

Short Answer

Expert verified
Answer: Terms of trade is the rate at which goods or services are exchanged between countries in international trade, and it is essentially the ratio of a country's export prices to import prices. Favorable terms of trade indicate that a country can buy more imports with the same amount of exports, while unfavorable terms of trade mean that a country must export more to purchase the same amount of imports. Factors that can influence a country's terms of trade include currency exchange rates, supply and demand, changes in production costs, and trade barriers.

Step by step solution

01

Define Terms of Trade

Terms of trade refers to the rate at which goods or services are exchanged between countries through international trade. More specifically, it is the ratio of export prices to import prices for a country. A favorable terms of trade means that a country can buy more imports with the same amount of exports, while an unfavorable terms of trade indicates that a country has to export more to purchase the same amount of imports.
02

Provide an Example

Suppose Country A exports 1 unit of electronics to Country B and imports 2 units of textiles from Country B. The terms of trade for Country A can be calculated as the value of electronics exports (in terms of textiles) divided by the value of textiles imports. If 1 unit of electronics costs 100 dollars and 1 unit of textile costs 50 dollars, the terms of trade for Country A would be 100/50, which equals 2. This means that Country A can exchange 1 unit of its electronics for 2 units of textiles from Country B.
03

Discuss Factors Affecting Terms of Trade

Factors that influence a country's terms of trade include currency exchange rates, supply and demand, changes in production costs, and trade barriers. Stronger exchange rates can improve a country's buying power, leading to favorable terms of trade. Likewise, a higher demand for a country's exports will increase export prices and improve terms of trade. However, changes in production costs, such as higher wages or input prices, can reduce the competitiveness of a country's exports and lead to unfavorable terms of trade. Finally, trade barriers like tariffs and quotas can also affect terms of trade by increasing the cost of exports or limiting the access to foreign markets.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Analyse the determination of the supply of foreign exchange in a flexible or floating exchange rate system.

What is Adam Smith's theory of absolute advantage? Explain.

The gross barter terms of trade can be written as $$ T_{N}=\frac{P_{X}}{P_{M}} $$

Currency board is an arrangement, where a country abandons its domestic currency and adopts a strong foreign currency like the dollar.

The foreign exchange market is a market, where foreign currencies are purchased and sold.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free