Question

Look at a country’s Terms of Trade (T.O.T.). It is assumed that when the T.O.T. value increases the country’s wellbeing goes up, and when the T.O.T. value declines, the country’s wellbeing is reduced. Do you agree??? Explain!

Answer 1

Terms of trade (TOT) can be defined as the ratio between a nation's export prices and the import prices. An improvement in T.O.T indicates that for every unit of exports sold by a country can buy more units of imported products. Thus an increase in the terms of trade creates beneficial terms of how many products need to be exported to buy a given amount of imports. It signifies that nation is accumulating more capital from exports than it is spending on imports; thus results to a beneficial effect on domestic cost-push inflation and consequently country’s wellbeing goes up