International business

1. What are the terms of trade?
• The terms of trade
measures the
relative prices of the
products that we
export compared to
the cost (prices) of
the goods and
services that we
import

2. How do we measure the terms of
trade?
• By dividing an index of
export prices by an
index of import prices
• If the terms of trade
index goes up, we say
that the terms of trade
have improved
• If the index falls, we
say that the terms of
trade have
deteriorated

3. Why does this matter?
• The terms of trade
affect the gains from
trading with other
countries
• It also impacts on
variables such as the
balance of payments
and living standards

4. Australia is heavily dependent on trade
For most commodities, Australian traders are
price takers in global markets
Substantial trend improvement in the
Australian terms of trade over the last ten-
to-twelve years
Reflects the global commodity boom and
appreciating Australian dollar
Improvement in
terms of trade
Terms of trade
now starting to
move lower –
mining boom is
coming to an end
Australia

5. Terms of trade and the exchange rate
• The terms of trade ratio is heavily influenced
by changes in the exchange rate
• A rise in the value of a country domestic
currency decreases prices for its imports but
also makes exports less competitive
• Thus a higher currency improves the terms of
trade but might worsen the balance of trade

6. Prices of Imported Technology
Affects relative prices of capital
inputs needed to sustain growth
Balance of Payments
Export and import prices affect
the value of trade flows
Factors determining the Terms of Trade
• Reciprocal Demand
• Tariff
• Change in taste
• Changes in factor endowments
• Technological Improvement
• Economic growth
• Devaluation
• Balance in Payment position
• International capital flows
• Import substitutes

7. Meaning of Free Trade
Free trade is a policy where no tariffs, restrictions,
and other devices obstructing the flow of goods
between the nations are imposed

8. Meaning of Free Trade Agreement
A free trade agreement is a pact between two or more
nations to reduce barriers to imports and exports
among them. Under a free trade policy, goods and
services can be bought and sold across international
borders with little or no government tariffs, quotas,
subsidies, or prohibitions to inhibit their exchange.

9. Definition of Free Trade :
Lipsey writes, “a world of free trade would be one with no
tariffs and no restrictions of any kind on importing or
exporting. In such a world, a country would import all those
commodities that it could buy from abroad at a delivered
price lower than the cost of producing them at home.”

10. ADVANTAGES OF FREE TRADE
Maximization of world output
Optimum use of resources
Large factor incomes
Optimization of consumption
The absence of restrictions will enlarge the markets
Prevents emergence of monopolies
Encourages inventions and also develops transport
and communication
Educative effects
Good Policy for economic development

11. DISADVANTAGES OF FREE TRADE
Absence of pre-requisite of free trade
Cut throat competition
Lop-sided development
Excessive foreign dependence
International transmission of fluctuations
Import of harmful products
Emergence of monopolies
Detrimental for development

12. PROTECTION OF FOREIGN TRADE
Meaning - Protection on trade occurs when
countries impose restrictions on imports into
the economy. It can be defined as a nation or a
group of nations working in conjunction as a
trade bloc, creating trade barriers with the
specific goal of protecting its economy from
the possible perils of international trading

13. ARGUMENTS FOR TRADE PROTECTION
Protect Infant Industries
Protect Sunset Industries
Protect strategic industries
Protect Non renewable sources
Help the Environment

14. ARGUMENTS AGAINST PROTECTION OF
FOREIGN TRADE
Consumers limited choices
Hinders growth of infant industry
Exchange rate controls

15. METHODS OF TRADE PROTECTION
Tariffs
Quotas
Subsidies
Requirement of local content
Administrative trading policies
Antidumping policies
Exchange rate controls

16. More great study resources from
tutor2u:
Economics Blog
A2 Macro Revision Notes