Question

In: Economics

Taking the index of export prices, import prices, volume of exports, and productivity in the export...

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.

Solutions

Expert Solution

               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


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