Terms of Trade Exercises

Price ($ per unit)

Exports 2011 2012 2013
Good A 250 240 265
Good B 180 176 178
Good C 320 332 360
Total 750 748 803
XPI 100 100 107

Imports
Good D 380 390 402
Good E 210 200 205
Good F 120 103 124
Total 710 693 731
MPI 100 98 103
Terms of trade 100 102 104

1. Complete the table. (6 marks)

2. Interpret the terms of trade movements from 2011-12 and 2013-14. (6 marks)
Improvement in both years. In 2011-12 export prices were stable and import
prices decreased. In 2012-13 both export and import prices rose however export
prices rose by a greater proportion compared to import prices.
3. What are the effects on the economy of a deterioration in the terms of trade? (6
marks)
p.100 Figure 5.3
4. Using your text, summarise the ‘Dutch disease’ phenomenon. (4 marks)
p.101
5. Would an improvement in a country’s terms of trade tend to increase or decrease
the standard of living in that country? Explain your answer. (5 marks)
increase standard of living as either exporters are receiving a higher income from
higher export prices or consumers have higher purchasing power due to lower
import prices, or both.