Impact of changes in the terms of trade on the economySyllabus: Explain how changes in the terms of trade in the long term may result in a global redistribution of income.
Syllabus: Examine the impacts of short-term fluctuations and long-term deterioration in the terms of trade of economically less developed countries that specialize in primary commodities, using the concepts of price elasticity of demand and supply for primary products and income
elasticity of demand.
|Many developing countries are vulnerable to deterioration in the terms of trade, because they are very dependent on exports of primary commodities - minerals, agricultural commodities like coffee, wheat, soya etc.|
Prices of commodities are more volatile than for manufactured goods. If prices of these commodities on world markets fall,then developing countries face a deterioration in their terms of trade. They are earning less imports from the same volume of exports so they cannot import as much. Their standard of living will fall, not because of anything they did, but simply due to the fluctuations of world markets.
The impact of changes in the terms of trade on the standard of living:
- An improvement in the terms of trade may improve the standard of living in a country - the same volume of exports will buy more imports.
- A deterioration in the terms of trade may reduce the standard of living as more exports have to be sold to pay for the same volume of imports.