Economy
The
surge in energy prices due to the Russia-Ukraine conflict could trigger a
‘terms-of-trade’ shock for large net energy importers like India
·
Terms of trade are outlined because the ratio between the
index of export costs and the index of import costs.
·
• If the export costs increase more than the import costs, a
country has a positive terms of trade, as for a similar amount of exports, it
can purchase more imports.
·
An abrupt amendment in a country’s terms of
trade (e.g. -A drastic fall in the value of a primary product thats a
country’s main export) will cause serious balance-of-payments issues if the
country depends on the foreign exchange earned by its exports to pay money for
the import of its manufactured product and capital equipment.
·
Factors determining
terms of trade of a country Reciprocal demand, i.e. ““the strength and elasticity of every country’s demand for
the other country’s product”-If India’s demand for Russia’s natural gas becomes
a lot of intense (inelastic), the worth of natural gas (India,s import)
rises more than the price of India’s export, the commodity terms of trade will
move against India and in favour of Russia.
·
Tariff-When a country imposes tariffs on imports from the
foreign country, it implies a lesser willingness to absorb the foreign product,
probably to boost the terms of trade for the
tariff- imposing country.
·
Tastes or preferences
of the people in India shift from the natural gas of Russia to its own Coal,
the terms of trade will become favourable to India.
·
In an opposite situation, the terms
of trade can turn against this country.
·
Changes in factor
endowment-If there is an increase in the supply of labour in India,
specialising in the production of labour-intensive commodity cloth, the fall in
labour cost will lower the price of cloth (export).
·
Consequently, more
quantity of cloth will be offered by India for the same quantity of Natural gas
from Russia resulting in the terms of trade becoming unfavourable to India.
·
If labour becomes
scarcer in this country, the terms of trade are likely to become favourable for
it.
·
Changes in
technology-As there is technological improvement in the home country, say A, there
is rise in productivity and/or a fall in the cost of producing exportable
commodities, say cloth.
·
If technological
progress is labour-saving in this labour-intensive export sector (cloth
industry) there will be worsening of the terms of trade.
·
In case this kind of technical progress takes place in the
import-competing sector during this county, therell be an improvement in the
terms of trade.
·
If capital-saving technical progress takes
place in the labour-intensive export sector, there will still be the chance of
improvement in the terms of trade.
·
Growth-As in the of labour within the labour- abundant
country
·
A increases or growth
takes place.
·
The cost and price of
exportable commodities falls leading to the terms of trade decline for the
growing home country A, although the volume of trade will get enlarged.
·
If the supply of scarce factor capital will increase,
subsequent to growth, the cost} and price of importable good steel can fall
relative to the value of cloth.
·
This can cause the
improvement in the terms of trade for the growing home country A however the
volume of trade will get reduced.
·
Devaluation causes a
lowering of export prices relative to import prices, the terms of trade are
supposed to get worsened after devaluation of the home currency.
·
Balance of Payments Position-If a country is faced with a
deficit in balance of trade and payments and its to adopt measures intended to
restrict import and enlarge exports such as the internal deflation,
devaluation, import and the exchange controls, the terms of trade are likely to
get worsened.
·
International Capital Flows-An increased flow of
capital from abroad involves larger demand for the merchandise of the creditor
country and ensuant rise in the costs of imported product.
·
Import Substitutes-If theres sufficient production of close
substitutes for import merchandise at intervals the home country, its
reciprocal demand for the foreign merchandise are going to be weak and
therefore the terms of trade are likely to become favourable for the home
country.
·
Impact of worsening
terms of trade due to Ukraine war- (impact of ukraine war already explained) A
decline in the terms of trade means the price of exports falls relative to
imports.
Thus, following impact: Imports become more expensive leading to
the current account deficit imported inflation Capital outflows Depreciation of
domestic currency need for export for a given import- supply disruption
declining living standards and lower GDP leading reduce export revenue and make
it harder to pay foreign external debt Decline of forex reserve
Stagflation-high inflation and lower output.
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