From 1971 to 2006, terms of trade changes had a negative and rather small effect on welfare in Iceland. For this covered period, the average yearly percentage growth of Iceland’s terms of trade was minus 0.21%. The time series diagram and the time trend line show this downward trend of Iceland’s terms of trade. The yearly average percentage change in GDP due to terms of trade was minus 0.05%. This effect is very small compared to the actual 24.34% average annual growth of Iceland's GDP (EconLit F110, F140, O470).
Table of Contents
1. Abstract
2. The Effect of Terms of Trade Changes on Welfare in Iceland
3. References
Research Objectives and Themes
This report investigates the impact of fluctuations in terms of trade on national welfare in Iceland between 1971 and 2006, specifically assessing whether these changes significantly influenced the country's economic growth.
- Analysis of Iceland's terms of trade volatility and long-term trends.
- Calculation of average annual percentage growth in GDP.
- Application of economic formulas to determine the share of imports in GDP.
- Quantitative evaluation of the correlation between terms of trade changes and GDP performance.
Excerpt from the Book
The Effect of Terms of Trade Changes on Welfare in Iceland
A general statement made in Krugman & Obstfeld (2009, p. 93) is that “a rise in the terms of trade increases a country's welfare, while a decline in the terms of trade reduces its welfare”. In this report, I try to analyse the effect of terms of trade changes on welfare in Iceland. To investigate this relationship, I retrieved information on Iceland’s GDP, Export Unit Values (PEX) and Import Unit Values (PIM) for the time period going from 1971 to 2006 (International Monetary Fund, 2008). Amounts are expressed in the national currency, i.e. the Icelandic króna (ISK).
From 1971 to 2006, Iceland's GDP grew from ISK 570mios to ISK 1,167,680mios. Therefore, the average yearly growth of Iceland's GDP during the covered period was:
To investigate the effect of terms of trade changes on this average yearly growth, I first used PEX and PIM data to compute the country’s terms of trade for each year of the covered period, using the following equation:
(Terms of Trade , year i) = (PEXi / PIMi) x 100 , where 1971 ≤ i ≤ 2006.
A time series diagram and a time trend line show the evolution of Iceland’s terms of trade from 1971 to 2006 (figure 1). The reference year is 1995 where terms of trade are fixed at a level of 100.
Summary of Chapters
1. Abstract: Provides a concise summary of the research findings, highlighting the negative but minor impact of terms of trade changes on Iceland's welfare between 1971 and 2006.
2. The Effect of Terms of Trade Changes on Welfare in Iceland: Details the analytical framework, methodology, and data application used to measure the relationship between fluctuating terms of trade and GDP growth.
3. References: Lists the academic sources and data repositories, including the IMF and Krugman & Obstfeld, that supported the economic analysis.
Keywords
Terms of Trade, Iceland, Welfare, GDP Growth, International Trade, Import Unit Values, Export Unit Values, Economic Volatility, Macroeconomics, Statistical Analysis, R Environment, Icelandic króna.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines the effect of changing terms of trade on the national welfare of Iceland over the period from 1971 to 2006.
What are the central themes explored in the study?
The central themes include the volatility of trade prices, the calculation of annual GDP growth, and the application of theoretical economic models to real-world national data.
What is the primary research goal?
The goal is to determine if the fluctuations in terms of trade significantly hampered or boosted Iceland's economic welfare during the observed period.
Which scientific methodology is employed?
The author uses quantitative analysis, calculating terms of trade indices and applying the formula derived from Krugman & Obstfeld to isolate the impact of trade changes on GDP.
What topics are covered in the main section?
The main section covers the retrieval of IMF data, the calculation of growth rates, the visualization of trade trends, and the derivation of the share of imports in GDP.
Which keywords characterize the work?
Terms of Trade, Iceland, Welfare, GDP Growth, and International Trade are the defining keywords for this research.
What did the analysis reveal about the terms of trade in Iceland?
The analysis showed a general downward trend with significant volatility, particularly observing the largest swing between 1973 and 1975.
How does the author quantify the impact on GDP?
By multiplying the percentage change in terms of trade with the share of imports in GDP, the author estimates that the effect on GDP was approximately -0.05%.
What conclusion does the author reach regarding Iceland's welfare?
The author concludes that while the effect of terms of trade changes was negative, it was ultimately insignificant compared to the overall GDP growth of 24.34%.
- Quote paper
- Maxime Dessy (Author), 2008, The Effect of Terms of Trade Changes on Welfare in Iceland, Munich, GRIN Verlag, https://www.grin.com/document/145291
