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March 29, 2024, 10:20:50 pm

Author Topic: Terms of Trade Index  (Read 1193 times)  Share 

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costargh

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Terms of Trade Index
« on: April 17, 2008, 05:35:37 pm »
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Can someone explain to me how the terms of trade index works in "simple terms" and how it is different to a rise or fall in the Australian Dollar?

Eriny

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Re: Terms of Trade Index
« Reply #1 on: April 17, 2008, 05:55:30 pm »
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ToT is quite a difficult concept, in October I was still confusing it with the Trade-Weighted Index.

Anyway, Terms of Trade refers to the price of goods exported relative to the price of goods imported. So, if we have a high ToT that means that the cost of imports is lower than the cost of exports. As you may be able to tell, it doesn't work independently from the exchange rate, but it is not the same thing. If the vale of the AUD is high then it will cost more for countries overseas to buy our exports, so they'll either buy less (lowering or ToT) or in some cases (as s the case currently) if Australia is a major exporter in a certain good (e.g. minerals) then the goods will continue to be bought at a high price and the ToT will rise.

Sorry if that's unclear, as I say, it's a confusing concept.

costargh

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Re: Terms of Trade Index
« Reply #2 on: April 17, 2008, 06:04:07 pm »
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Oh ok. So with your example with Australia's minerals... because their is a global boom for minerals (especially in China), China is still purchasing a high quantity of resources regardless of the price which in effect rises the ToT.

But if for example Australia was producing wool for exports and the $A was high, other countries may be able to purchase wool for cheaper from say New Zealand and thus the ToT would decrease as a result of a decrease in exports.

Cool Cool. Thanks Eriny. I thought it had to at least have something to do with the AUD but wanted clarification.
=)