Explain how the terms of trade of an economy will be affected by changes in that economy's exchange rate.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. [1] states what the terms of trade measures
2. [1] an accurate formula of the terms of trade index
3. [1] a rise in an economy's exchange rate means that there is a fall in the price of imports
4. [1] and a rise in the price of exports
5. [1] and that this will lead to a rise (accept 'improvement') in the terms of trade
6. [1] a fall in an economy's exchange rate means that there is a rise in the price of imports
7. [1] and a fall in the price of exports
8. [1] and that this will lead to a fall (accept 'deterioration') in the terms of trade
9. [3] analysis explaining how an expenditure-reducing policy can correct a deficit in the current account
10. [1] with reference to a disadvantage of this approach
11. [3] analysis explaining how an expenditure-switching policy can correct a deficit in the current account
12. [1] with reference to a disadvantage of this approach
13. [3] evaluative comment comparing the advantages and disadvantages of the two approaches
14. [1] conclusion on which is the more effective