Question

2. The table below shows indexes for the prices of imports and exports over several years for a hypothetical country. Year Import Prices Export Prices Term of Trade 2014 90 110 2015 95 87 2016 98 83 2017 100 100 2018 102 105 2019 100 112 2020 103 118 a. Compute the terms of trade in each year for this country. b. In which span of years do the terms of trade improve? c. In which span of years do the terms of trade deteriorate? d. Explain why a terms of trade "improvement" is good for the country.

Answer 1

Year	Import prices	Export Prices	TOT(%)
2014	90	110	122.22
2015	95	87	91.58
2016	98	83	84.69
2017	100	100	100
2018	102	105	102.94
2019	100	112	112
2020	103	118	114.56

a) Terms of trade is calculated as;

TOT = Export prices / Import prices * 100

b) Terms of trade improves from year 2017-2020. After year 2016, the terms of trade keep improving from 100, 102.94, 112, 114.56 because exports were greater than the imports.

c)Terms of trade deteriorate from year 2014-2016. After year 2014, the terms of trade keep deteriorating from 122.22, 91.58, 84.69 because exports were less than the imports.

d) Terms of trade of a country measure the country's export prices in relation to its import prices. When the terms of trade rise above 100 they are said to be improving and when they fall below 100 they are said to be worsening. When a country’s terms of trade improve, it means that for every unit of exports sold it can buy more units of imported goods. So potentially, a rise in the terms of trade creates a benefit in terms of how many goods need to be exported to buy a given amount of imports.