Understanding the Terms of Trade Effect

What does the Terms of Trade measure?

• The ratio of imports to exports

• The difference between exports and imports

• The total value of exports multiplied by imports

• The average price of exports divided by the average price of imports

What indicates an improvement in the terms of trade?

• A unit of export buys relatively more imports

• Import prices rise relative to export prices

• Export prices decrease

• None of the above

What is a likely effect of a currency devaluation on the terms of trade?

• Improvement in the terms of trade

• Deterioration in the terms of trade

• No change in the terms of trade

• All of the above

What happens to the domestic price of exports when a currency falls in value?

• Becomes volatile

• Remains unchanged

• Increases

• Decreases

What effect does an appreciation of the currency have on the terms of trade?

• No change

• Unpredictable changes

• Deterioration

• Improvement

Which factor can affect the terms of trade?

• Number of businesses

• Exchange rate

• Population size

• Country's political stability

What is the impact of higher inflation in a country on its terms of trade?

• Temporary improvement

• Permanent improvement

• Deterioration

• No impact

What was the effect of Sterling's appreciation from 1990 to 2005?

• Rise in terms of trade

• Fall in terms of trade

• No change in terms of trade

• Decreased export prices

What is the expected impact of an appreciation on export competitiveness?

• No change in competitiveness

• Exports become more competitive

• Exports are banned

• Exports become less competitive

What might keep the terms of trade stable despite changes in exchange rates?

• All of the above

• Sudden increase in raw material costs

• Firms maintaining steady prices

• Rapid changes in government