Read the information below about Valora, a cocoa-exporting economy. In 2022, its export-price index rose from 100 to 130 after global cocoa demand increased...
Question 1 Report
Read the information below about Valora, a cocoa-exporting economy. In 2022, its export-price index rose from 100 to 130 after global cocoa demand increased. Its import-price index rose from 100 to 110 because fuel costs also increased. The government wants to use extra export income for economic growth.
(a) Calculate Valora's terms-of-trade index in 2022, using: export-price index / import-price index x 100. [3]
(b) Explain what the calculated figure means for Valora's purchasing power from exports. [2]
(c) Assess whether higher cocoa export prices will necessarily improve living standards in Valora. [3]
Answer Details
(a) Terms of trade compare export prices with import prices:
\[\frac{\text{export-price index}}{\text{import-price index}}\times100=\frac{130}{110}\times100=118.2\]
The terms-of-trade index is 118.2, or 118 when rounded. [3]
(b) The terms of trade have improved because export prices rose more than import prices. [1] Therefore, a given quantity or value of Valora's cocoa exports can buy relatively more imports than before. This is an increase in purchasing power from exports. [1]
(c) Higher cocoa prices can increase the income of exporters, government tax revenue and foreign-currency earnings. [1] These gains may finance public services, investment, or imports that support economic growth and living standards. [1] However, improved living standards are not certain: income may mainly go to large producers, cocoa prices may later fall, or inflation and dependence on imports may limit gains for households. [1]
The terms of trade measure relative prices, not how equally export income is shared.
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