Terms of trade changes on welfare

Excerpt Abstract From toterms of trade changes had a negative and rather small effect on welfare in Iceland.

Terms of trade changes on welfare

This paper analyzes the relevance between export and real GDP by using the Pearson correlation and partial correlation method, with the final consumption as the economic welfare evaluation index. This paper also presents the change of national wealth by using the weak axiom of revealed preference theory.

It is the export structure of labor intensive products with low price elasticity that mainly lead to the continuously decline of terms of trade in China. Introduction China has benefited a lot from the economy globalization with the international trade as an important promoting tool. In some circumstance, economic growth could result in a country being worse off than before the growth through the international trade.

Many scholars at home and abroad have done many researches in terms of trade and related issues. Prebisch deems that the terms of trade of export products primary products in developing countries are deteriorating in the long run.

Krugman argues that rapid developing country does not necessarily experience a deteriorating terms of trade process, and they can avoid the drop of relative prices through commodity diversification [2].

Terms of trade

The improvement of terms of trade has a negative effect on the purchasing power of a country, which may reduce consumption and welfare Terms of trade changes on welfare [3].

Although developing countries will suffer a loss in international trade, while at the same time the international trade can also bring many dynamic interests for developing countries [5]. Xu and Sui et al. In this paper, the terms of trade in an open economy is combined with the changes in the national income in a dynamic economy based on revealed preference analysis.

The terms of trade is defined as the ratio of the average price of export commodities to the import commodities, which is given as follows: Figure 1 gives the import price index, export price Figure 1.

This paper analyzes the changing trend and causes of terms of trade in three phases: The development direction of structure of export and import in the future in our country was pointed out in this period. The proportion of processing trade rose with fluctuation, the proportion of manufactured goods increased continuously and the proportion of primary products decreased.

China mainly exported manufactured goods of which processing trade accounting for a large proportion, and began to import primary products instead, while manufactured goods were still the priority.

During this period, the export price index rose steadily, and the import price index rose at first and dropped later. The terms of trade improved continuously.

The proportion of exported primary goods declined and of imported kept rising, but for the manufactured goods, the proportion of exports rose continuously and of imports declined. The proportion of primary goods and manufactured goods to exports and imports developed towards opposite directions.

That is to say, there were more and more exported manufactured goods in China, therefore the export price index should go up. However it was not the case. The exports in China depend mainly on processing trade, which was driven by the foreign direct investment FDI.

Terms of trade changes on welfare

The growth of FDI in China remained at a rapid speed. After the entry to the WTO sincethe trade barriers have reduced and the imports have increased sharply in China.

Terms of Trade Effects: Theory and Methods of Measurement | U.S. Bureau of Economic Analysis (BEA)

The FDI in exports and imports account for a large proportion in trade in China and the cheap labor forces is the main reason that attracts the FDI. The foreign investors put the end-value products into China to reduce the price of exports.

They export the products processed with the imported raw materials and make China the price taker. Therefore, the author holds the idea that the reduce of exported products index, which leads to the declines of terms of trade, is due to the exports of processing products with low price elasticity of demand.

The proportion of imports declined continuously with the imports of primary products increasing dramatically and exports decreasing with fluctuation.

We may notice that, after the entry to WTO, the growth in exports spurted. Although the amount of exports soured in this period, the price index of exported products rose during this period, which indicates that the added value in exported manufactured products was promoted sharply.

Because of the increase of skilled workers and the improvement of infrastructure, the mechanical and electrical products and the mechanical equipment products took up a large proportion in the total exports. And this made the condition of foreign trade improve a lot. Also in this period, the world crude oil price and iron ore prices rose sharply, which drove the speedy increase in the import price index.

As a result, the increase in import price index was far more than that in export price index and that lead to the downturn in terms of trade. Also in the study, we find that the terms of trade improved for a short term in due to the shrink of the economy caused by the global financial crisis.

During this period, the price of international commodities decreased and the growth bubble in crude oil and iron ore burst.

Compared with the export powers such as Japan, Germany and Taiwan province, the export price index dropped slower in China, which indicates that the exports of processing products has not been changed essentially like in Japan and Germany.

The exports still relied in the middleand low-end products with low price elasticity of demand price and the products made in China still regarded as necessities. From this point, some Chinese scholar claim that the economic growth in China relies strongly on the exports. Therefore when analyzing the relation between the exports and the real GDP, we should control consumption and investment.

The author has studies the relationship between exports and real GDP with Pearson relevant and partial correlation analysis method in China in different years and also has the correlation test for consumption, investment and exports.Based on the statistics of , this paper analyzes the changing trend and causes of terms of trade in China and studies the overall movement in China’s national wealth by introducing the GDI index under SNA accounting framework.

•The terms of trade refers to the price of exports relative to the price of imports. – When a country exports cloth and the relative price of cloth increases, the terms of trade rise. • Because a higher relative price for exports means that the country can afford to buy more imports, an increase in the terms of trade increases a country’s welfare.

Terms of trade. A country’s terms of trade measures a country’s export prices in relation to its import prices, and is expressed as. For example, if, over a given period, the index of export prices rises by 10% and the index of import prices rises by 5%, the terms of trade are.

From to , terms of trade changes had a negative and rather small effect on welfare in Iceland. For this covered period, the average yearly percentage growth of Iceland’s terms of trade was %.

The effect of terms of trade changes on welfare in Belgium Abstract In this work I will study the effect of terms of trade changes on welfare in Belgium between and International Trade: Assignment 2 How terms of trade changes a ected welfare in (country) Luc Hens 6 February 1 Due date Due on Thursday 4 May at the beginning of class.

Terms of trade - Wikipedia