Practise explaining why terms of trade improve or worsen using relative prices, inflation, productivity, labour costs and exchange rates.
Between 2000 and 2020, Gibraltar's terms of trade worsened by 44.6% and Greece's terms of trade worsened by 14.3%. Evaluate factors that might cause a country's terms of trade to worsen.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis (12 marks) - indicative content
- Understanding of terms of trade
- Understanding of worsening in terms of trade
Possible factors could include:
- Low relative inflation rates: decreases relative export prices
- Higher relative productivity rates: reduces cost per unit and therefore export prices
- Lower relative labour costs (both wage and non-wage costs): decreases cost per unit and therefore export prices
- Depreciation/devaluation of the exchange rate: reduces export prices and increases import prices
- Higher relative levels of capital investment: increases productivity, thereby decreases cost per unit and export prices
- Change in the price of commodities, e.g. oil (a fall in the price of commodities for net exporters, and rise in price of commodities for net importers)
- Falling competition in the markets of a country's main imports/ rising competition in the markets of a country's main exports
- Protectionist policies, e.g. if a country raises a tariff on imported goods then this would cause an increase in import prices
N.B. Award maximum of Level 3 ( 9 marks) if a candidate does not refer to a country of their choice in their answer
Level
Mark
Level 0
Level 1
1-3
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident, but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Prioritisation and significance of the most important factor
- Different factors will be more important at different time periods, e.g. since 2020 relative inflation rates are likely to be more significant
- It is likely to be a combination of factors that has led to a significant worsening in the terms of trade
- Different factors will be important in different economies, e.g. the price of oil will be highly important in Saudi Arabia, but not in other countries
- Depends what production of goods and services the country specialises in
- Importance of labour costs depend on whether country tends to import and export more labour-intensive or capital-intensive goods and services
- Exchange rates are very volatile and may not be the most significant factor as it could change frequently
- Retaliation by countries in response to protectionist policies could quickly reverse the changes in terms of trade
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.