In: Economics
Taking the index of export prices, import prices, volume of exports, and productivity in the export sector in a developing nation to be equal to 100 in 1980, in 2010 what would be:
i. The commodity terms of trade of this nation if the index of its export prices rises by 10 percent but the index of its import prices rises by 20 percent.
ii. This nation’s income terms of trade if the index of export volume grows to 130 by 2010.
iii. This nation’s single factoral terms of trade if its productivity index in the export sector rises to 140 by 2010? iv. Is the nation better off in 2010? Explain using your results above.
i) Initial index of export prices=100
New index of export prices= 100+10 = 110
Initial index of import prices = 100
New index of import prices = 100+20 = 120
Therefore, terms of trade = (Index of export prices/ Index of import prices)*100
= (110/ 120)*100 = 91.67
ii) Rise in index of export volume = 130
Therefore, nation’s income terms of trade =
(Index of export prices/ Index of import prices)*index of export volume
= (110/ 120)*130 = 119.167
iii) Rise productivity index in nation’s export = 140
Therefore, nation’s single factoral terms of trade =
(Index of export prices/ Index of import prices)*productivity index in nation’s export
= (110/ 120)*140 = 128.33