Question (1 Viewer)

[sedrickhead]

Hey guys I recently did one of my economics exams and I got this question and didn't really understand part of it:
How will changes in the Terms of Trade impact Australia's exchange rate and international competitiveness,

I understand the whole exchange rate part but as for international competitiveness I was not 100% sure about how the Terms of Trade can affect that could anyone tell me how you would go about answering that.

Thanks

 

[Mathew587]

The good thing about eco is that if you know your content and the links, your essays will be very flowy if you know what I mean. I'm no state ranker... yet (jks) but what I would do is break down the question. The main points and the features are TOT, with which the main feature is X/M, exchange rates, to which the main feature is appreciation and depreciation, and international comp., with which the main componenets are its effect on exports and imports.
Therefore, your plan would look something like this:

1. TOT which refers to: X/M
2. X rate which refers to: app. and depr.
3. International comp. which impacts: X and M

* as we're looking at TOTs effect on the others so talk about an*
- appreciation on TOT and
- Depreciation on TOT
on the X rate and International comp.

There you have it. You have your paragraphs:
affect of appreciation in tot on 1) x rate and 2) international comp.
affect of depreciaiton in tot on 3) x rate and 4) international comp.

if you need more help or elaboraton on something, just ask. I've got nothing much to do for the next couple of days anyways.

 

[sedrickhead]

Hey thanks for the help well forgot to mention it was a short answer question (3 marks) but I assume the format is pretty much the same?

Also what I was wondering was how the ToT actually affects international competitiveness just a bit confused on that, do you know what you would write for that?

Thanks

 

[BenHowe]

The good thing about eco is that if you know your content and the links, your essays will be very flowy if you know what I mean. I'm no state ranker... yet (jks) but what I would do is break down the question. The main points and the features are TOT, with which the main feature is X/M, exchange rates, to which the main feature is appreciation and depreciation, and international comp., with which the main componenets are its effect on exports and imports.
Therefore, your plan would look something like this:

1. TOT which refers to: X/M
2. X rate which refers to: app. and depr.
3. International comp. which impacts: X and M

* as we're looking at TOTs effect on the others so talk about an*
- appreciation on TOT and
- Depreciation on TOT
on the X rate and International comp.

There you have it. You have your paragraphs:
affect of appreciation in tot on 1) x rate and 2) international comp.
affect of depreciaiton in tot on 3) x rate and 4) international comp.

if you need more help or elaboraton on something, just ask. I've got nothing much to do for the next couple of days anyways.

When you say exports and imports, you need to ensure you refer to to the relative price indexes of both, NOT quantity. If you consider an economy that exports apples and imports bananas. If exports prices are greater than import prices then you have a favorable terms of trade, as this suggests that (ceterus parabus) you will ultimately recieve a greater amount of income credits than debits for your exports and imports respectively.

However you need to consider this in relation to the forex market, because consider if export prices are too high (if you wanted to be really good you could bring in ppp here) then less exports will ultimately be purchased. However if imports are consumed at the same rate as before, this means that that the demand for AUD will decrease. This will result in a depreciation in aud. This will make Australia more competitive and is great for exporters but it will conversely decrease the domestic purchasing power of international goods.

However the converse is also true as Australia has a predominantly de-regulated financial market with a floating exchange rate. This means that the above example would eventually change and result in the converse etc.

Just make sure when you explain it, you refer to equations and diagrams and if you really want awesome marks then you need to integrate past or current economic statistics into your explanation.

Just realised it was a 3 marker lol. With short answer questions you can use notation for like this leads to = -> and for increase/decrease an up or down arrow respectively. So in regards to the question it says changes. Plural. So unless you do both cases you won't get full marks. ToT=ratio of relative prices of exports and imports. Increase p of exports -> decrease in demand -> depreciation of AUD -> increase in international competitiveness for exporters. Then do the opposite. If you have room include de-regulated financial market and floating exchange rate

 

[sedrickhead]

When you say exports and imports, you need to ensure you refer to to the relative price indexes of both, NOT quantity. If you consider an economy that exports apples and imports bananas. If exports prices are greater than import prices then you have a favorable terms of trade, as this suggests that (ceterus parabus) you will ultimately recieve a greater amount of income credits than debits for your exports and imports respectively.

However you need to consider this in relation to the forex market, because consider if export prices are too high (if you wanted to be really good you could bring in ppp here) then less exports will ultimately be purchased. However if imports are consumed at the same rate as before, this means that that the demand for AUD will decrease. This will result in a depreciation in aud. This will make Australia more competitive and is great for exporters but it will conversely decrease the domestic purchasing power of international goods.

However the converse is also true as Australia has a predominantly de-regulated financial market with a floating exchange rate. This means that the above example would eventually change and result in the converse etc.

Just make sure when you explain it, you refer to equations and diagrams and if you really want awesome marks then you need to integrate past or current economic statistics into your explanation.

Just realised it was a 3 marker lol. With short answer questions you can use notation for like this leads to = -> and for increase/decrease an up or down arrow respectively. So in regards to the question it says changes. Plural. So unless you do both cases you won't get full marks. ToT=ratio of relative prices of exports and imports. Increase p of exports -> decrease in demand -> depreciation of AUD -> increase in international competitiveness for exporters. Then do the opposite. If you have room include de-regulated financial market and floating exchange rate

Thanks for the help I never knew you could use those signs as well, that'll help save some space when I'm writing I'll make sure I use them in the future.