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Terms of Trade

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Emina Adzamija

on 26 December 2014

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Transcript of Terms of Trade

Terms of Trade
What are Terms of Trade?
Calculating the Terms of Trade
Terms of trade is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100.
Developed and Developing Countries
Developing countries are subject to more volatile shocks than developed countries are.
So are terms of trade for developing countries different and why?
The value of a country’s exports relative to that of its imports.
When the terms of trade rise above 100 they are said to be improving and when they fall below 100 they are said to be worsening.

A rise in the terms of trade increases a country’s welfare, while a decline in the terms of trade reduces its welfare.
Worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports.
If a country’s terms of trade improve, it means that for every unit of exports sold it can but more units of imported goods.
Are terms of trade for developing economies different and why?
Developing Countries
Developed Countries
A developed country is a country that has a highly developed economy and advanced technological infrastructure relative to other less industrialized nations.
A developing country is a country with a lower standard of living.
Economic Growth
+ Larger market
+ Lower import prices

- More competition
Economic Growth at Home
+ Exports increase

- Benefits passed on to foreigners
[(average export price index)/(average import price index)] ×100
source: ukranianguide.com
source: ge-ip.com
source: goforwood.com
developing countries' exports
Immiserizing Growth
a net drop in the nation's welfare even though there appears to be a growth in the nation's welfare because of the wealth effect

idea that export biased growth by poor nations would worsen their terms of trade so much that they would be worse off than if they had not grown at all
Productivity increases...
In developed nations means higher wages
In developing nations means lower prices of exports

terms of trade of developing nations tend to deteriorate over time
source: fao.org
types of exports
reactions to increases in productivity
immiserizing growth paradox

"Countries Compared by Economy Terms of Trade. International Statistics at NationMaster.com." NationMaster.com. NationMaster, n.d. Web. 03 Nov. 2014.

The Editors of Encyclopædia Britannica. "Terms of Trade." Encyclopedia Britannica Online. Encyclopedia Britannica, n.d. Web. 03 Nov. 2014.

Krugman, Paul R., and Maurice Obstfeld. International Economics: Theory and Policy. Seventh ed. Boston, MA: Addison-Wesley, 2005. Print.

"The Observatory of Economic Complexity." OEC: Ecuador (ECU) Profile of Exports, Imports and Trade Partners. N.p., n.d. Web. 03 Nov. 2014.

Salvatore, Dominick. International Economics. Fourth ed. New York: Macmillan, n.d. Print.
Terms of Trade. Stuttgart: Deutscher Sparkassenverlag, 1988. Web.

"Terms of Trade | Raúl Prebisch Y Los Desafíos Del Siglo XXI." Terms of Trade | Raúl Prebisch Y Los Desafíos Del Siglo XXI. N.p., n.d. Web. 03 Nov. 2014.

"Terms of Trade." Terms of Trade. N.p., n.d. Web. 03 Nov. 2014.

"Terms of Trade (TOT) Definition | Investopedia." Investopedia. N.p., n.d. Web. 03 Nov. 2014.

source: bbc.co.uk
Case Study
Ecuador, top exporter of bananas
Stats of Ecuador
70th (out of 189) on the list of exporting countries in 2012 with $24.65 billion.

95th (out of 104) on the list of terms of trade with their ToT of 40 in 1999 (where 1980 was the base year of 100)

Ecuador vs. Italy: Products and Services

Product import: 27 305 Product export: 24 951
Service import: 3 419 Service export: 1 922

Product import: 477 391 Product export: 517 740
Service import: 107 329 Service export: 110 205

source: pngimg.com
Comparison: Italy
Italy has a terms of trade of 132 (9th on the list).
They export a much larger quantity of services compared to Ecuador.

Data retrieved from wto.org
What does Ecuador export and import?
Crude Petroleum 50.24%
Bananas 11%
Crustaceans 5.4%

Refined Petroleum 11%
Coal Tar Oil 7.4%
Cars 3.1%
Data retrieved from: atlas.media.mit.edu
Types of Growth
Export biased growth
which is growth that disproportionately expands a country’s production possibilities in the direction of the good it exports

Import biased growth
is growth biased toward the good a country imports

Kanita Avdic 71728 Emina Adzamija 71729
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