1. Recap – making trade work
Cost per unit in worker hours
Jumpers
Chocolate
England 24 8
France 9 6
France – absolute advantage for both
France – comparative advantage for jumpers
UK – comparative advantage for chocolate
England will benefit from trade if they get at least 1 jumper for every 3 units of chocolate they export
France will benefit if they get at least 3 units of chocolate for every 2 jumpers
Diagram – cost ratio (jumpers for 3 units of chocolate)
Shaded area is where it would be mutually advantageous to trade
England will benefit if…. France will benefit if…. TRY TO EXPRESS THIS AS A DIAGRAM OF COST RATIOS OF JUMPERS TO CHOCOLATE TO SHOW WHERE TRADE WOULD BE MUTUALLY BENEFICIAL.

2. ‘the ratio of export prices to import prices’
Terms of Trade
‘the ratio of export prices to import prices’

3. DISCUSSION POINT
In 2014, the world price of crude oil approximately halved. For a few countries around the world, like Venezuela and Saudi Arabia, oil exports account for the vast majority of their exports. For these countries, what happens to the amount of imports they can buy with each barrel of oil exports? Are the better off or worse off?

4. Learning aims Calculation of terms of trade
Factors influencing a country’s terms of trade
Impacts of changes in a country’s terms of trade

5. Calculating the terms of trade
It is a ratio between average export prices and average import prices. The formula is:
Index of terms of trade = Index of export prices x 100
Index of import prices
Note: an index is used as it is a weighted average of thousands of different import and export prices

6. The terms of trade deteriorate when the opposite is true.
Over to you…
Year 1 2 3 4 5 6
Index of import prices
105 99 95 97
100
110
Index of export prices
107
102
Index of terms of trade
104.8
108.1
110.5
105.2
95.45
Would you be able to answer:
Between which years is there an improvement in the terms of trade?
Between which year is there a deterioration in the terms of trade?
An explanation of how you arrived at answers 1 and 2?
KEY POINTS:
Terms of trade improve when its value increases (export prices rise relative to import prices)
The terms of trade deteriorate when the opposite is true.

7. Factors influencing the terms of trade
A change in the exchange rate
Inflation
Demand of imports and exports
Productivity
Changing incomes
LOGICAL CHAIN OF REASONING
POINT
EXAMPLE
EXPLAIN/EFFECT

8. BoP Knowledge recap What is it?
Which account do you think would link to this topic? CURRENT ACCOUNT

9. Knowledge recap
Price elasticity
What is it?

10. Task
Complete the table on your hand out on the effect of changes in import and export prices on the terms of trade and the current account balance. Talk through each scenario and fill in the blanks with either ‘improve’ or ‘deteriorate’

11. KEY POINTS
The terms of trade are the ratio of export prices to import prices
Terms of trade are influenced by a variety of factors including exchange rate, relative inflation and relative productivity levels
The impact terms of trade have on the current account will depend on the price elasticity of imports and exports
Changes in terms of trade can affect GDP, inflation and the level of unemployment.