Question

2. The terms of trade position for Country X for the years 2020 and 2021 are given in Table 1 (Price index of exports and price index of imports for each year).
(a) Calculate the terms of trade for Country X in 2020 and 2021.
(b) In what year(s) is the terms of trade (i) favourable (ii) unfavourable? Give a reason for your answer in each case.
(c) State any two likely reasons for the terms of trade position identified in (b).
(d) If the balance of trade in 2022 is $4,062,500 and the current account balance is $812,500, determine the country's balance of invisible trade. Explain your answer.

Accepted Answer

(a) Terms of Trade = (Index of export prices / Index of import prices) x 100.
For 2020: (180/150) x 100 = 120.
For 2021: (160/200) x 100 = 80.

(b) 2020 is favourable: the terms of trade index is above 100, meaning export prices can pay for imports and still save about 20%. 2021 is unfavourable: the index is below 100, meaning export earnings cannot fully pay for the cost of imports (import prices are about 20% above export prices).

(c) Likely reasons for the unfavourable terms of trade: devaluation or depreciation of the local currency; and over-dependence on foreign (imported) products.

(d) Current Account Balance = Balance of Trade + Balance of Invisible Trade, so Balance of Invisible Trade = Current Account Balance - Balance of Trade = $812,500 - $4,062,500 = -$3,250,000. This negative figure indicates an unfavourable balance of invisible trade, meaning the country pays more for services (e.g. shipping, insurance, tourism) than it earns from rendering such services to the rest of the world.

WAEC Economics 2025 Theory — Question 2

Sign up free to unlock