Australia's Terms of Trade

1. Data of ToT over the 10 year period of 2001-2010
 

2001   104.8%

2002   105.85%

2003   105.92%

2004   116.18%

2005   131.08%

2006   145.52%

2007   152.39% 

2008   174.63%

2009   162.98%

2010   178.9

2. Identify the year to year trends in the terms of trade. 

From the year 2000 to 2010 there is a pretty consistent and even to say a rapid yearly increase in terms of trade, growing from a 100% in year 2000 to 178.9% in 2010. 

Even though the data shown a pretty clear increasing trend, from year 2008 to 2009 there was a drop in ToT from 174.63% to 162.98% respectively. Yet for the next year ToT picked up again and increased from the 2009 162.98% to 178.9% in 2010, being the highest and latest value in the data, proving the clear increasing trend.

3. Identify the changes in trade balance over this same period.  

changes in trade balance were quite unrelated to those of ToT, and show more of a fluctuation. A decrease from 2001 til 2005, dropping from 0.18% to -2.72%, from there on it picked up again and increase to -1.61% in 20017. and since then has been fluctuating heavily yearly.

Balance of trade as a % of GDP
2001   0.18%

2002   0%

2003   -2.12%

2004   -2.7%

2005   -2.72%

2006   -1.81%

2007   -1.61% 

2008   -2.6%

2009   0.1%

2010   -0,97%

The trade of balance in this data is represented as a percentage of GDP, and is generally fluctuating on the negative side meaning there is a trade deficit; more expenditure on imports than earned from exports. 

In years 2001, 2002, and 2009 there were slight positive values, at 0.18%, 0% and 0.1% respectively. The trade balance values were the lowest in 2004, 2005 and 2008 at

4. Next, using your understanding of price elasticity of demand, research the types of exports and imports for your assigned country.

IMPORTS: Australia is a major importer of machinery and transport equipment, computers and office machines and telecommunication lasers. Therefore tertiary goods

EXPORTS: Rich in natural resources, Australia is a major exporter of commodities. Metals like iron-ore and gold account for 28 percent of total exports, coal for 18 percent and oil and gas for 9 percent. Manufactured goods constitute 33 percent of the total exports with food and metal products and machinery and equipment accounting for the biggest share. Agricultural products, particularly wheat and wool make up 5 percent of trade outflows. Mainly primary and secondary goods.

a. Based on the results of your research, to what degree do you think demand for exports/imports is elastic or inelastic?

Most of Australia's exports are demand inelastic as they are primary and secondary goods. Yet many if not most of the goods imported by Australia are elastic in demand as they require higher technology and labour skill for production and are priced higher, therefore are known to be price elastic in relation to demand.

b. Based on your research, does it appear that changes to the terms of trade has affected the balance of payments?
In this specific example I don't see a clear correlation between the Terms of Trade and balance of payments, as the fluctuation in the trade balance has very little correlation with the values of ToT

Review questions -economic integration

1. Using a diagram, explain the difference between a free trade area and a customs union. Use real world examples

A free trade area is just a trading bloc that involves several countries trading in between themselves with no boundaries in place.

Yet, a customs union involves a free trade area as it is one step higher in the economic integration. instead of just not having any trading boundaries between the bloc countries, They have also agreed on common external trading barriers put in place for countries outside of the customs union.

An example of a free trade bloc is NAFTA, consisting of Mexico, Canada and United States of America.
Example of a customs union is CARICOM, consisting of Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent, the Grenadines, Suriname, Trinidad and Tobago.


2. Discuss the likely effects of a membership of a customs union. Use a real world example.

From stepping into a customs union a member is likely to experience either trade creation or trade diversion. As well as membership can also increase the market size as well bring more diversity and development of products such as technology. Yet if country A has higher production costs of certain goods than other countries in the bloc, country A might experience higher unemployment than before due to production shifting from their country to the others and vice versa.

Trade creation- a reduction in tariff barriers leading to an increase in consumer surplus and economic welfare. As well as production going from a higher cost producer to a lower cost producer therefore leading to a regain of world efficiency. 

Trade diversion-international economics in which trade is diverted from a more efficient exporter towards a less efficient one, causing welfare loss as well as loss of world efficiency.

Example: UK joined EU, they had a comparative advantage in the production of lawn mowers, resulting in trade creation in the EU when trading barriers are removed. Before the French were making lawnmowers on a higher cost. Now consumers benefit from lower costs of lawnmowers from England as well as there is regain of world efficiency.

3. Evaluate the consequences of membership of a monetary union. Use a real world example.

The consequences include:
the reduction in transactions cost of changing currency;
the reduction of exchange risk leading to greater trade and foreign investment, and to a lower risk premium embodied in the cost of raising capital;
increased transparency in price comparison;
political gains of closer union and cooperation brought about the greater closeness of economic relationships; - preparation for complete economic and monetary integration as well as keeping relations smooth


Example: European Union