Past hsc Multiple choice question (1 Viewer)

[girrawhat]

Hey guys, i was doing past papers for eco and i was completely stumped on this question. Could any of you guys please explain.

 

[deswa1]

I'm assuming you understand where the inflation bit comes from so I won't explain that. The import price index, as well as the terms of trade, is something a lot of people misunderstand. It measures the relative PRICES of imports and exports, not neccessarily their volumes or whether our trade surplus is positive etc. So if export volumes decrease, this will have no impact on the TOT as long as prices remain constant. Having this knowledge now, it is clear why it isn't A.

Does this make sense?

And on a technical level, the question I think is wrong because the import price index actually has nothing to do with export prices but thats the only option left that makes sense. Is it D?

 

[girrawhat]

The answer is D. I get how it has nothing to do with trade volume. Could u explain how the inflation decreased.

 

[Aesytic]

the inflation rate is calculated by the CPI of the previous year subtracted from the CPI of the current year, divided by the CPI of the previous year. then that value is multiplied by 100 to give you the inflation rate as a percentage. do that for year 1 to year 2 and year 2 to year 3 to compare their inflation rates

 

[will_]

the answer looks like C to me. the CPI has increased, ie. inflation is increasing, and the import price index has fallen ie. the TOT has improved

 

[deswa1]

The answer is D. I get how it has nothing to do with trade volume. Could u explain how the inflation decreased.

Well, the inflation rate from Year 1 to year 2 is (130-120)/120=8.3% whilst from Year 2 to Year 3 it is (135-130)/130=3.8% -> Therefore lower

 

[deswa1]

the answer looks like C to me. the CPI has increased, ie. inflation is increasing, and the import price index has fallen ie. the TOT has improved

The CPI will always tend to increase over time in a normal economy (i.e. that doesn't have inflation). The inflation rate only increases if the percentage increase of the CPI in the second year is greater than the percentage increase in the first year

 

[girrawhat]

Thankyou. It all makes sense now. I was thinking it had to be something to do with calculating inflation