Inferior
good: A type of
good for which demand declines as the level of income or real GDP in the
economy increases. This occurs when a good has more costly substitutes that see
an increase in demand as the society's economy improves. An inferior good is
the opposite of a normal good, which experiences an increase in demand along
with increases in the income level.
An example of an
inferior good is public transportation. When consumers have less wealth, they
may forgo using their own forms of private transportation in order to cut down
costs (car insurance, gas and other car upkeep costs) and instead opt to use a
less expensive form of transportation (bus pass).
Q.
Define Terms of Trade (May’11, Dec’12 and Dec'13).
Terms
of Trade: The Terms of Trade measures the relative price of
exports compared to the price of imports.
Terms of Trade =
100 * Average export prices / Average Import prices.
Basically, the
terms of trade refers to how many exports will need to be sold in order to be
able to purchase imports.
i) If the price
of exports increases, there will be an improvement in the terms of trade.
ii) If the price
of exports falls, there will be a decline in the terms of trade.
Importance
of the terms of Trade: To some extent we can use the terms
of trade to measure the strength and well-being of an economy. A prolonged fall
in the terms of trade will reduce living standards. The US, will find that it
can increasingly purchase less imports from abroad. But, at the same time it is
also quite limited. For example, devaluation doesn’t necessarily harm a
country. Devaluation does make exports more competitive and can increase
economic growth.
There is much
more to the strength of an economy than the terms of trade.
For example:
Volumes of trade
productivity
capital flows
economic growth
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