Archive for the 'Terms of Trade' Category

Feb 26 2013

Examining terms of trade data

Published by under Terms of Trade

Terms of trade has always been one of the trickier topics to teach in IB Economics. Stated simply, a nation’s terms of trade is a numerical representation of the country’s export prices relative to its import prices. With this in mind, the intuitive interpretation is that a “strong” terms of trade is desirable, while a “weak” terms of trade is undesirable. However, it’s not always so cut and dry.

In looking around for some data on terms of trade, I came upon the World Bank’s database of “Net barter terms of trade index”, which measures “the percentage ratio of the export unit value indexes to the import unit value indexes, measured relative to the base year 2000”. So, basically, the numbers tell use how much higher or lower each nation’s export prices are relative to their import prices today as compared to 2000.

Follow the link above and study the data for various countries. Create some graphs and plot a few countries against one another. See if you can come up with some hypotheses regarding what may account for changes in different country’s terms of trade since 2000. For example, study the table below and answer the questions that follow.

ToT_graph

Questions:

  1. Describe the changes in the four nations’ terms of trade since 2003.
  2. Why do all nations start close to 100?
  3. How might China’s trade balance have been affected by the changes in its terms of trade since 2000?
  4. How might Venezuela’s trade balance have been affected by the changes in its terms of trade since 2000?
  5. What are some possible causes for the improvements in Venezuela’s and Saudi Arabia’s terms of trade? 
  6. What was the likely cause of the dip in both Venezuela’s and Saudi Arabia’s terms of trade in 2008-2009?
  7. Under what circumstances will an improvement in a nation’s terms of trade lead to an improvement in its trade balance? When does a deterioration in terms of trade improve the trade balance?

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