Question

if demand increases for the export good of country A how does the elasticity of country A's offer curve influence the extent to which its term of trade will improve?

Answer 1

if demand increases for the export good of country A how does the elasticity of country A's offer curve influence the extent to which its term of trade will improve?

Terms of trade(TOT) is given by a formula: (Average export prices/ Average Import prices)*100.

It also measures the amount of imports that can be bought per unit of exports. If exports demand increases then average prices of exports will go up and hence, more imports can be bought. This will cause improvement in terms of trade. More elastic supply(flatter curve), quicker will be the improvement in terms of trade and balance of trade improvement.

If exports are elastic then, increased demand can be met and hence TOT will improve immediately. Hence balance of trade will improve for a country.

If exports become expensive then it will lose export competitiveness and less exports will be made. This will cause improvement in TOT but balance of trade may worsen. However, these changes depend on how the demand and supply respond in medium to long run.