why would an improvement in the Terms of Trade be a negative thing? (1 Viewer)

[want2beSMART]

^Yikes, I wasn't typing an essay, I was answering a question. Obviously I wasn't going to go over my expression with a fine toothed comb.

And with TOT and exports - when interpreting, we use the volume, not the prices. The TOT itself is a price index when measuring, but the interpretation is based around volumes. So you wouldn't go into how prices would affect the demand, because that has nothing to do with the interpretation.

And I mentioned exchange rates are a link as to why it would be positive, I didn't automatically 'associate' it with TOT. Also, exchange rates can provide the link to a 'negative' which I posted later on in the thread... so exchange rates do have something to do with TOT.

If my post offended you, that wasn't it's intention. I was just contributing to the thread.

lol no you didnt offend him...hes a great guy who will offer all he can to help us

so he just explained the topic with immense detail so that it would be easier for you to understand =D

 

[ifsonotso_100]

when you say that when the tot improves the cad worsens, is this simply because exports have become more expensive contributing to lower levels of exports? hence worsening the cad. ?

 

[Mandy101]

^I'm guessing you addressed that to Will Hunting, but I'll have a go until he gets time to answer..

An improvement in the TOT means that our exports are more powerful and can buy more imports. That means that our exports are bringing in more money - the Balance on Goods and Services will improve (exports are a credit), and that will improve the CAD.

That is the immediate effect. AFTER the export prices have risen, demand may fall, which will then lead to less money coming in from exports which leads to a deterioration in BGS and therefore the CAD.

That's a postulation of what could happen after the improvement, but:

As an immediate result of TOT improvement the CAD would improve. It has to, there has been an increase in credits which would improve the BGS and therefore the Current Account balance.

The after effects of the TOT improvement however can later worsen the CAD.

 

[Rorix]

the debt trap is a situation where an economy has to borrow money to service foreign debt, which creates more foreign debt which requires more money to service. It's a vicious cycle, an economic circumstance that countries try to avoid... Australia can be considered to be in the debt trap due to it's liquidation of public assets into private hands known as privatisation. Not good for us at all...

Just like to point out that this is not actually true, privatisation of government assets (which is more for competition reasons than debt but i digress) would only serve to aid gov't debt repayments (if it was actually being sold for debt purposes which again I stress is not) and the public sector in Australia is now a net saver.

Privatisation has nothing to do with a debt trap, and there is nothing to indicate atm that Australia is in one as the capacity to pay off foreign debt is decreasing and the net income component of CAD is steadily falling (long term trends).