Question

Suppose that over the past five years, the price of commodities exported by Ghana fell by 10 percent, and the import price of capital goods increased by 20 percent. Analyze what these changes imply about Ghana's commodity terms of trade.

Answer 1

A 10 percent fall in Ghana's export commodity prices and a 20 percent rise in capital goods import prices imply a worsening of Ghana's commodity terms of trade, declining export income, and increased import costs.

Step-by-step explanation:

The changes in commodity prices and the import price of capital goods have significant implications for Ghana's commodity terms of trade. A 10 percent decrease in the price of commodities Ghana exports means it receives less income for the same amount of exports. Concurrently, a 20 percent increase in the price of imported capital goods means Ghana has to spend more to acquire these goods. This dual effect can potentially deteriorate Ghana's trade balance, as its earnings from exports decline while costs for imports rise, reducing the purchasing power of its exports relative to its imports. This situation reflects a worsening of Ghana's commodity terms of trade, which is the ratio of the index of export prices to the index of import prices.