Terms of Trade (1 Viewer)

[godofindolence]

Can someone please explain how exactly is import and export price index calculated.
The Dixon textbook says it is the proportional change in the level of import/export prices. But from what I understand, ToT is a measure of the ability of an economy to pay for its exports based on revenue of its imports. Therefore wouldn't volume be calculated as part of the index as well.

Also can someone explain these?
http://www4.boardofstudies.nsw.edu....wer=A&courseID=15110&testQuestionID=345920913

http://www4.boardofstudies.nsw.edu....wer=A&courseID=15110&testQuestionID=345916328

 

[happyhunter]

Basically the terms of trade is the ratio of the price we receive for out exports, relative to the price we pay for imports.

It can be calculated by:

Export Price Index
------------------------ x 100
Import price index

If the TOT improves this means export prices are increasing relative to import prices, and we can now buy more imports with the same amount of exports
If the TOT worsens this means export prices are decreasing relative to import prices, and we can now buy less imports with the same amnount of exports.

So with this information we can conclude the first question is indeed A.

As for the second question to calculate the inflation rate you can use this equation:

CPI (CY) - CPI (PY)
--------------------------- X 100
CPI (PY)

So we can conclude the rate from year 2-3 has gone down. For the 'Import Price Index' i am not 100% sure. I don't think they would give you something like this and if someone else can explain it that would be good