Terms of Trade Changes on Welfare in Belgium

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The effect of terms of trade changes on welfare in Belgium

Abstract

In this work I will study the effect of terms of trade changes on welfare in Belgium between 1993 and 2007. For 1993-1995 I used the time series available for export and import prices in International Financial Statistics Yearbook 2004. For the remaining years (1996-2007) I used the time series for export and import prices available in the 2006 Yearbook. Terms of trade is Export Prices/Import Prices. It is the relationship between the prices at which a country sells its exports and the prices paid for its imports.

Over time the terms of trade tend down. A rise in terms of trade increases a country’s welfare, while a decline in terms of trade reduces its welfare.

The Effect of Terms of Trade Changes on Welfare in Belgium

In this assignment I want to analyze the welfare effect of changes in the terms of trade in Belgium. To investigate this relationship I used information on Belgium’s Export unit values/Export prices, Import unit values/Import prices and GDP between 1993 – 2007 (for 1993-1995 period I used the time series available for export and import prices in International Financial Statistics Yearbook 2004. For the remaining years (1996-2007), I used the time series for export and import prices available in the 2006 Yearbook). The indices of unit values (prices) are expressed in terms of US Dollars: 2000=100.

A time series diagram and a time trend line were traced to see Belgium’s evolution in terms of trade from 1993 to 2007 (Figure 1). The reference year is 2000 where terms of trade are fixed at a level of 100. According to the time trend line observed in figure 1, terms of trade have a decreasing position throughout this covered period. The tendency of terms of trade is downward sloping meaning this roughly that Belgium’s import values are superior to its exports. There’s also some variability during the time period covered. The largest swing observed...
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