Relationship between ToT and CAD (1 Viewer)

[astab]

Hi guys,

What impact does changes in the terms of trade have on the CAD. If Australia undergoes structural change assisted by productivity improvements and producers are able to lower export prices, our international competitiveness improves but export prices fall. Say our exports are highly elastic and price falls increases the total volume of exports sold, does our CAD get better? Generally, would you say that an improvement in the terms of trade is complemented by an improvement in the CAD?

 

[photastic]

J Curve will explain what happens when TOT decreases and its impacts in the short and long term. So the answer to your question depends on which context you are asked.