Explain each of the following terms: (a) Export promotion (b) Depreciation (c) Terms of trade (d) Balance of trade.

Answer Details

(a) Export promotion. This is a deliberate government policy and set of measures aimed at increasing the volume and value of a country's exports, so as to earn more foreign exchange and improve the balance of payments. Measures include export subsidies, tax reliefs, favourable exchange rates, provision of export credit, and setting up export-processing zones.

(b) Depreciation. The term has two common senses. In production/accounting it is the fall in the value of a fixed asset (such as machinery) due to wear and tear, age or obsolescence over time. In international finance it is a fall in the external value of a country's currency relative to other currencies under a floating exchange-rate system (for example, the naira exchanging for fewer dollars than before).

(c) Terms of trade. This is the rate at which a country's exports exchange for its imports, usually expressed as an index: \( \text{Terms of trade} = \dfrac{\text{index of export prices}}{\text{index of import prices}} \times 100 \). A rise in the index (export prices rising relative to import prices) means the terms of trade are favourable, since a given quantity of exports now buys more imports.

(d) Balance of trade. This is the difference in value between a country's visible exports and visible imports of goods over a period. If visible exports exceed visible imports the balance of trade is favourable (surplus); if visible imports exceed visible exports it is unfavourable (deficit).

Examination reminder: when the context is exchange rates, "depreciation" means a fall in the currency's value; when the context is capital/assets, it means loss in an asset's value. Read the surrounding wording to choose the right sense.