A quick Terms of Trade question...?? (1 Viewer)

[16021991]

Basically, I understand what impacts upon the terms of trade but the question I have, is about the impact of the terms of trade....

What impact does an adverse change in the terms of trade have on the economy?

Nothing even close to an answer in either of my textbooks, and I'm stumped.

Help?

Thanks guys.

 

[Lex152]

Terms of trade relates to the amount of imports we can buy relative to how much we export (it doesn't include volumes as you know).
Therefore a detrioration in the terms of trade reduces our ability to purchase imports (sustainably).

 

[gnrlies]

think about how lower export prices might affect us. The frustrating aspect of this question is that it is indeterminate.

Remember back to elasticity? well essentially lower export prices may indeed increase our export revenues.

Nonetheless there is a result that usually occurs when this happens. Because australian exporters are usually price takers, they tend to be negatively affected by a deterioration in the terms of trade. This is because the price change doesn't reflect some profit maximising decision made by Australians who can set their own price, but rather a decline in the price on global markets.

Consider the recent deterioration of the terms of trade. Because we are price takers in commodities markets, australian mining companies have been hit and their profits have declined. furthermore this has had an impact on our budgetary position.