kaus123 Posted May 16, 2011 Report Share Posted May 16, 2011 Just wanted to confirm that what I'm thinking is correct:When the terms of trade of a country improve, it means that the same amount of exports buy more imports than before. However an improvement in the terms of trade means that the price of exports has increased because the currency has appreciated. Therefore the Balance of Payments for that nation would consequently worsen or improve according the the relative elasticity of the export(s).Thus if the exports and price inelastic, an increase in their price (due to the improvement in ToT) would mean a less than proportional negative change in their quantity demanded meaning that BoP would improve.However for elastic exports, an improvement in the terms of trade would mean a more than proportional negative change in their quantity demanded thus BoP would actually worsen in this case.Is my interpretation correct? Reply Link to post Share on other sites More sharing options...
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