What are the terms of trade?

They are the rate at which a country's exports exchange for its imports, measured as the index of export prices divided by the index of import prices, multiplied by 100.

A country's export price index is 110 and its import price index is 125, both against a base year of 100. Calculate the terms of trade and interpret the result.

The terms of trade are 110 ÷ 125 × 100 = 88, so they have deteriorated by 12% from the base year value of 100 and a given volume of exports now buys fewer imports.

Starting from a base year in which both indices are 100, export prices rise by 8% and import prices by 4%. Calculate the new terms of trade.

The export price index becomes 108 and the import price index 104, so the terms of trade are 108 ÷ 104 × 100 = 103.8 to one decimal place, an improvement of 3.8%.

What have been the main consequences of globalisation for developed economies?

Cheaper imports and wider choice have raised real incomes and held inflation down, but manufacturing employment has shifted abroad, creating structural unemployment concentrated in particular regions.

How has globalisation affected the freedom of national governments to set policy?

Because capital and profits are mobile, a government that raises corporate taxes or tightens regulation risks losing investment to other countries, which limits its room for manoeuvre and encourages a race to the bottom.

OCR A-Level Economics H460

Introduction to Microeconomics

Topic overview Economic and free goods, scarcity and positive and normative statements Economic agents and the factors of production Factor rewards, rationality and the objectives of economic agents Incentives and the functions of the price mechanism Market, planned and mixed economies and allocative and productive efficiency Opportunity cost, trade-offs and the production possibility curve Shifts of the production possibility curve and uses of opportunity cost

Microeconomics: The Role of Markets

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Microeconomics: Market Structures

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Microeconomics: The Labour Market

Topic overview Derived demand for labour and wage elasticity of demand Labour productivity, unit labour costs and marginal revenue product Supply of labour and wage elasticity of supply Short and long run labour supply, transfer earnings and economic rent Wage differentials, labour mobility and monopsony Trade unions, bilateral monopoly and the effects of monopsony Wage determination in a competitive labour market and labour market flexibility

Macroeconomics: Aggregate Demand and Aggregate Supply

Topic overview The circular flow of income, injections and leakages Methods of measuring national income Components of aggregate demand and their determinants The slope of the aggregate demand curve and what shifts it Consumption, income and the role of expectations Short run and long run aggregate supply curves Shifts in short run and long run aggregate supply Macroeconomic equilibrium and the effects of demand and supply shifts The national income multiplier and marginal propensities The accelerator, the economic cycle and output gaps

Macroeconomics: Economic Policy Objectives

Topic overview Economic growth, real and nominal GDP and GDP per capita Short and long run growth, the economic cycle and the effects of growth Economic structure, deindustrialisation and sustainable development Limitations of GDP and the Human Development Index Employment, unemployment rates and the objective of full employment Measures, types and costs of unemployment and the effects of full employment Inflation, deflation, real values and the CPI and RPI Calculating inflation with index numbers and its causes and consequences Balance of payments accounts and current account calculations Causes and consequences of current account imbalances Key trends in UK macroeconomic performance Comparing UK performance internationally and the limits of economic data Income and wealth, redistribution and absolute and relative poverty Lorenz curves, the Gini coefficient and the causes of poverty The natural rate of unemployment and Keynesian and neo-classical aggregate supply Short and long run Phillips Curves and their usefulness

Macroeconomics: Implementing Policy

Topic overview The government budget, types of tax and the budget balance National debt, cyclical and structural deficits and crowding out The Laffer curve, average and marginal tax rates and limits of fiscal policy Interest rates, the money supply and inflation targets Quantitative easing, the exchange rate and limits of monetary policy Privatisation, deregulation and subsidies as supply side policies Competition policy, infrastructure, education and tax and benefit reform Labour market flexibility, immigration control and limits of supply side policy Conflicts between macroeconomic policy objectives

Macroeconomics: The Global Context

Topic overview Patterns of international trade and global supply chains Advantages and disadvantages of international trade Exchange rate calculations and how exchange rates are determined Exchange rate changes, the Marshall-Lerner condition and exchange rate systems Globalisation, international competitiveness and comparative advantage Terms of trade and the impact of globalisation and emerging economies Protectionism and the effects of a tariff Quotas, trade creation, economic integration and the World Trade Organisation

Macroeconomics: The Financial Sector

Topic overview Functions of money, credit creation and narrow and broad money The quantity theory of money and interest rates in the money market Roles of the financial sector, saving and investment The Harrod-Domar model and microfinance Financial regulation and the functions of a central bank Monetary policy effectiveness, limits of regulation and the IMF

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Themes in Economics: Synoptic Application

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Macroeconomics: The Global Context

Terms of trade and the impact of globalisation and emerging economies

1 thing to know
Component 02

Overview

Recall questions on calculating and interpreting the terms of trade, and the effects of globalisation, emerging economies and transnational corporations on developed and developing countries.

What you need to know

Answer each one before you reveal it.

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Key term

Why can an improvement in the terms of trade still worsen the current account?

Questions from this subtopic

Each one with the model answer underneath.

1
What are the terms of trade?
Model answer
They are the rate at which a country's exports exchange for its imports, measured as the index of export prices divided by the index of import prices, multiplied by 100.
2
A country's export price index is 110 and its import price index is 125, both against a base year of 100. Calculate the terms of trade and interpret the result.
Model answer
The terms of trade are 110 ÷ 125 × 100 = 88, so they have deteriorated by 12% from the base year value of 100 and a given volume of exports now buys fewer imports.
3
Starting from a base year in which both indices are 100, export prices rise by 8% and import prices by 4%. Calculate the new terms of trade.
Model answer
The export price index becomes 108 and the import price index 104, so the terms of trade are 108 ÷ 104 × 100 = 103.8 to one decimal place, an improvement of 3.8%.
4
Why can an improvement in the terms of trade still worsen the current account?
Model answer
Dearer exports may sell in much smaller volumes, so if demand for them is price-elastic total export revenue falls even though each unit earns more.
5
What have been the main consequences of globalisation for developed economies?
Model answer
Cheaper imports and wider choice have raised real incomes and held inflation down, but manufacturing employment has shifted abroad, creating structural unemployment concentrated in particular regions.
6
How has globalisation affected the freedom of national governments to set policy?
Model answer
Because capital and profits are mobile, a government that raises corporate taxes or tightens regulation risks losing investment to other countries, which limits its room for manoeuvre and encourages a race to the bottom.

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Introduction to Microeconomics

Microeconomics: The Role of Markets

Microeconomics: Business Objectives

Microeconomics: Market Structures

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