Economics
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Review exercise 3
The terms of trade refers to the ratio of the prices we receive for our imports to the prices we receive for our exports. An improvement in the terms of trade could be generated by an increase in world economic growth. Increasing GWP would mean rising world income and increase the demand and prices for our exports. This increase in demand for exports will increase the demand for Australian dollars.
A fall in global economic growth usually means a decline in commodity prices and a corresponding deterioration in the terms of trade.
An interesting point!
So, yes, the terms of trade story does a lot to explain and justify the long–term decline in the exchange rate. But get this: since 1985, commodities’ share of our total exports of goods and services has fallen from three–quarters to three–fifths – meaning that the continuing decline in commodity prices is getting less important to us as we diversify our export base.
Source: Gittins on Saturday December 2001
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