Subject: Economics Unit 3 AOS 2 (Macroeconomics > Government Goals > External Stability) Question: VCAA 2012 4d Explain the difference between the terms of trade and the current account balance. (2 marks) Tips / Notes: In any exam, if a question asks you to “explain the difference”, or to “compare”, or to “distinguish” between two things, it is insufficient to simply give the definitions for the two concepts. You actually have to explain a difference, or make a clear comparison or make a clear distinction in order to receive full marks. The terms of trade is one of the most poorly understood concepts in Economics, and hence is frequently assessed by VCAA in one way or another. Make sure you are confident describing the term and applying the term CORRECTLY in the RIGHT PLACES. The words, “value”, “price” and “cost” are NOT interchangeable. Make sure you use the correct terminology. Suggested Response: The terms of trade is a ratio of Australia’s export price index (a measure of change in the average prices Australia is paid for its exports) relative to Australia’s import price index (a measure of change in the average prices Australia pays for its imports). In contrast, the current account balance is the sum of the total difference (the balance of payments) in the values of Australia’s goods, services, primary income and secondary income sub-account credits and debits, over a period of time (usually one year). The difference is that whilst the terms of trade only measures the relative price of exports and imports, the current account balance compares the difference in the value of Australia’s exports and imports, as well as other foreign transactions. Consequently, the current account balance value can also be affected by changes in quantity and price of traded goods and services.
Posted on: Sat, 03 May 2014 09:49:35 +0000
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