Question on how terms of trade affects BOP (1 Viewer)

[nick90]

G'day. For an upcoming in-class essay assessment, one component of the question asks me to explain the relationship between the terms of trade and the balance of payments.

I realise that at the simplest level, the recents terms of trade boom should have lessened the deficit on the BOGS, helping to improve Australia's CAD. However an article from economics update last year that i was recently reading suggested that the terms of trade boom has worsened the CAD by:
- raising domestic incomes (which encourages Australians to increase import spending)
- contributing to the Dutch disease where the terms of trade boom causes the $AUD to appreciate, reducing export revenue and increasing import expenditure
- increasing the profits of foreign-owned mining firms in Australia, who then send their profits overseas (causing increased net income deficit)

In direct contrast to this, my teacher recently said that the CAD would now be worse if it weren't for the terms of trade boom.

So, my question is, what is the overall impact of the terms of trade boom on the BOP? Has it worsened the CAD, improved the CAD, or is it difficult to say? Do you think it would be worth going through those 3 ways in which the terms of trade boom has/ may have made the CAD worse in my essay?

Thanks heaps for any help you can give me!

 

[williamc]

At HSC level, good TOT = postive impact on BOP.

 

[2162]

just state it generally, ie good for bop, than talk about circumstances so you wont get marked down if its wrong

 

[kooltrainer]

have your reasoning... they won't disagree