4.1.4 Terms of trade Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. Which formula is used to calculate a country's terms of trade?

   • Terms of trade = (total exports minus total imports) / total exports x 100
   • Terms of trade = (average import price index / average export price index) x 100
   • Terms of trade = (average export price index / average import price index) x 100
   • Terms of trade = (export volume index / import volume index) x 100

2. A country's export price index is 120 and its import price index is 150. What are its terms of trade?

   • 270, since 120 plus 150 gives the total of the two price indices together
   • 125, since (150/120) x 100 gives the ratio of import to export prices
   • 30, since 150 minus 120 gives the difference between the two price indices
   • 80, since (120/150) x 100 = 80

3. Export prices rise by 5 per cent and import prices rise by 10 per cent from a base of 100. Which statement is correct?

   • Terms of trade fall to about 95.5, so each unit of exports buys fewer units of imports
   • Terms of trade fall to exactly 110, because import prices alone determine the terms of trade
   • Terms of trade rise to about 104.8, so each unit of exports buys more units of imports
   • Terms of trade rise to exactly 105, because export prices are the only price that matters

4. A country's terms of trade move from 100 to 90. Which is the correct interpretation?

   • Import volumes have risen by 10 per cent, since a fall in the terms of trade always reflects higher import demand
   • Each unit of exports now buys more units of imports than before, so the terms of trade have improved
   • Each unit of exports now buys fewer units of imports than before, so the terms of trade have deteriorated
   • Export volumes have fallen by 10 per cent, which is the only effect the change of terms of trade shows

5. Which is the most likely factor to improve a country's terms of trade?

   • A rise in world prices of the imports it buys relative to the prices of its exports
   • An equal percentage rise in both export and import prices, with no change in their relative level
   • A rise in world prices of its exports relative to the prices of the imports it buys
   • A rise in the country's import volumes, holding export and import prices constant at their base values

6. Which is a factor influencing a country's terms of trade?

   • The number of shipping ports within a country, which has no effect on prices of traded goods
   • The average age of the population, which affects the productivity of workers in all industries
   • The number of years a country has been a member of the United Nations and its regional bodies
   • Changes in the exchange rate, which alter the domestic-currency prices of exports and imports

7. A deterioration in a country's terms of trade is most likely to have which impact?

   • Each unit of exports buys more imports, so real incomes rise in every sector of the economy
   • Exporters receive higher revenue in domestic currency whatever the change in world prices
   • Each unit of exports buys fewer imports, so real incomes may fall even if export volumes are unchanged
   • Import prices fall relative to export prices, so households face lower costs for all goods bought

8. Which statement about a commodity exporter whose terms of trade deteriorate is most accurate?

   • Its real incomes must rise, because a fall in the terms of trade always lowers the price of imports
   • Its export volumes must fall to zero, since commodity prices and volumes always move together in the same direction
   • Its current account may worsen and real incomes may fall, even if its export volumes rise
   • Its current account must improve, because lower export prices always reduce import spending by more

9. An appreciation of a country's currency, with import prices in domestic currency unchanged, is most likely to have what effect on its terms of trade?

   • It improves, because export prices in foreign currency rise while import prices in domestic currency fall
   • It is unchanged, because exchange rates affect the trade balance but never the terms of trade
   • It worsens, because appreciation always reduces the volume of exports that foreign buyers are willing to purchase
   • It worsens, because appreciation raises both export prices and import prices by the same proportion

10. If world demand for a primary product rises sharply, how is a country exporting that product likely to be affected?

    • Its terms of trade are unchanged, because demand shocks affect volumes but never the relative prices of goods
    • Its terms of trade fall to zero, since a primary exporter cannot benefit from any increase in world demand
    • Its terms of trade worsen, because rising demand always raises the price of imported goods more than exports
    • Its terms of trade are likely to improve, as the price of its exports rises relative to the price of its imports

11. Is a rise in a country's terms of trade always beneficial?

    • Yes, because any rise in the terms of trade always increases both export volumes and export revenue together
    • No, because if it results from a fall in export volumes, total export revenue may not rise
    • Yes, because a rise always lowers unemployment and raises real wages in every sector of the economy
    • No, because a rise always reduces the purchasing power of export earnings for every country in the world

12. Export price index is 110 and import price index is 95. What are the terms of trade?

    • 205, since 110 plus 95 gives the total of the two indices
    • 115.8, since (110/95) x 100 is approximately 115.8
    • 15, since 110 minus 95 gives the change in the index
    • 85.5, since (95/110) x 100 is approximately 85.5

13. Export prices fall by 8 per cent and import prices fall by 4 per cent from a base of 100. What are the new terms of trade, to one decimal place?

    • 96.0, since the import price index is the only figure needed for terms of trade
    • 92.0, since only the export price index determines the terms of trade
    • 88.5, since the fall in export prices is simply added to the fall in import prices
    • 95.8, since (92/96) x 100 is approximately 95.8

14. In a base year the terms of trade are 100. In year two export prices are 150 and import prices are 125. What are the terms of trade in year two?

    • 25, since 150 minus 125 gives the difference between the two price indices
    • 275, since 150 plus 125 gives the sum of both price indices
    • 120, since (150/125) x 100 = 120
    • 83.3, since (125/150) x 100 = 83.3

15. Which statement describes the link between the terms of trade and a country's current account?

    • An improvement in the terms of trade raises export revenue relative to import spending, tending to improve the current account
    • A deterioration in the terms of trade always improves the current account, since imports become more expensive
    • The terms of trade and the current account are unrelated, because the current account only records financial flows
    • An improvement in the terms of trade always worsens the current account, because imports rise faster than exports

16. Which combination best describes a terms-of-trade improvement that is driven by a rise in export prices with no change in import prices?

    • Export revenue per unit falls and the same volume of imports costs more, so the country can buy fewer imports
    • Export and import prices both fall, so the country can buy neither more nor fewer imports than before the change
    • Export revenue per unit rises but imports cost more, so the country is unable to buy any additional imports
    • Export revenue per unit rises and the same volume of imports costs the same, so the country can buy more imports

17. Why is the terms of trade a useful indicator for a country's standard of living?

    • It records the number of tourists visiting the country, which is the main source of its real income each year
    • It shows how much imported goods a country can buy for a given volume of exports, reflecting purchasing power
    • It shows the rate of inflation in domestic prices, which is the only factor that determines household living costs
    • It measures the total number of workers in the export sector, which indicates the level of employment in the economy

18. Export prices index is 90 and import prices index is 100 (base 100). What are the terms of trade?

    • 190, since 90 plus 100 gives the total of the two indices added together
    • 10, since 100 minus 90 gives the terms of trade directly as a number
    • 90, since (90 / 100) x 100 = 90
    • 110, since 100 plus 10 gives the total change in the index from the base year

19. A country's terms of trade improve by 10 per cent, and export prices rise by 10 per cent while import prices are constant. Its export volume falls by 15 per cent. What happens to export revenue?

    • It is unchanged exactly, since a rise in price always offsets an equal fall in volume in every case
    • It rises by about 25 per cent, since 10 plus 15 gives the total percentage change in revenue
    • It rises by 10 per cent, since only the price change affects revenue and volume has no effect at all
    • It falls by about 6.5 per cent, since 1.10 x 0.85 = 0.935

20. What does a terms of trade index of 100 indicate?

    • That the country's export volumes have reached their maximum possible level for the period in question
    • That the country has no imports at all, so its terms of trade are fixed at the base level in every year
    • No change from the base year in the relative prices of exports and imports
    • That exports and imports are equal in value over the year, so the trade balance is exactly zero

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