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Terms of Trade Explained in 5 Minutes!
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- Many people believe that global trade is influenced by powerful countries that set the terms of trade, often disadvantaging developing nations.
- Terms of trade refers to the relationship between the price of a country receives for its exports and the price it pays for imports.
- In other words, it compares how much a country must spend on imported goods with how much it earns from selling its products abroad.
- Highly developed economies often import primary products, such as raw materials and agricultural goods from less developed economies.
- These raw materials are then processed and turned into manufactured goods, which are sold on global markets at higher prices.
- As a result, the value of products increases as they move through industrialized countries. Over past few decades, the prices of
- manufactured goods have generally risen steadily, while the prices of primary commodities have been more unstable and often lower.
- Because of this, developing countries frequently need to export larger quantities of raw materials to afford the manufactured goods they
- need to import. This situation often means less favorable and unpredictable terms of trade for LDEs.
- However, economic changes can sometimes create opportunities. For example, the rapid industrial growth of China has increased demand for raw
- materials, which has helped improve trade conditions for some parts of Africa, particularly in the East, West, and
- Central Africa. Despite these opportunities, the relationship is not always balanced. A good example is Addis Ababa, in
- Ethiopia, where by 2023, around 400 Chinese-funded investment projects, worth over 4 billion, were operating. These projects included the construction
- of about 70% of the country's new roads. While such investment supports development, it can also increase national debt, which, in Ethiopia's
- case, is already around 60% of its GDP. I hope this short video was useful. If it was, please do give it a like and subscribe to the channel.
- Thank you for watching.