terms of trade

In international economics and international trade, terms of trade are the ratio of the price of an export commodity(s) to the price of an import commodity(s). "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade is good for that country in the sense that it has to pay less for the products it imports, that is, it has to give up less exports for the imports it receives.

Two country model

In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the price a country must pay for its import commodity to the price it receives for its export commodity. In this simple case the imports of one country are the exports of the other country. For example, if a country exports 100 dollars worth of export product in exchange for 50 dollars worth of imported product, that country's terms of trade are 100/50 = 2. The terms of trade for the other country must be the reciprocal (50/100 = .5). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percent (200% and 50% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to .7), it has experienced a 30% deterioration in its terms of trade. When doing longitudinal (time series) calculations, it is common to set the base year to 100% to make interpretation of the results easier.

Multi-commodity multi-country model

In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyre's index. In this case, a nation's terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.

\left/ \right. Where

p_x^c=\mbox{price}\ \mbox{of}\ \mbox{exports}\ \mbox{in}\ \mbox{the}\ \mbox{current}\ \mbox{period},

q_x^0=

quantity of exports in the base period

p_x^0=

price of exports in the base period

p_m^c=

price of imports in the current period

q_m^0=

quantity of imports in the base period

p_m^0=

price of imports in the base period

Other terms-of-trade calculations

The net barter terms of trade is the ratio (expressed as a percentage) of relative export and import prices when volume is held constant.
The gross barter terms of trade is the ratio (expressed as a percent) of a quantity index of exports to a quantity index of inputs.
The income terms of trade is the ratio (expressed as a percent) of the value of exports to the price of imports.
The single factorial terms of trade is the net barter terms of trade adjusted for changes in the productivity of exports.
The double factorial terms of trade adjusts for both the productivity of exports and the productivity of imports.

Limitations

Terms of trade should not be used as synonymous with social welfare, or even Pareto economic welfare. Terms of trade calculations do not tell us about the volume of the countries' exports, only relative changes between countries. To understand a county's social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows. In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. The possibility of errors is significant.

Finding related topics

References

Bhagwati, J. (1959) Growth terms of trade and comparative advantage, Economia Internazionale, 1959.
Dorrance, J. (1948) The income terms of trade, Review of Economic Studies, 1948-49.
Krueger, A. and Sonnenschein, H. (1967) The terms of trade, the gains from trade, and price divergence, International Economic Review, vol 8-1, February, 1967, pp. 121-127.

<< Previous

Word Browser

Next >>

soviet military administration in germany
sergei ivanovich tiulpanov
chittagong
chittagong division
lac repressor
australian film institute
calvert, buckinghamshire
portland general electric
lawrence brown
the long walk (judge dredd)
markland

naseeruddin shah
raj kapoor
ayala center
meena kumari
notch filter
list of historians by area of study
currency bill tracking
gabriela
woughton on the green
river teign
international school manila

charles follen mckim
swabian
as 203
saint brisson sur loire
maverick (tv series)
seymour melman
laurie skreslet
maverick (movie)
thinkgeek
laafta
neo grec

biogen idec
macintosh iisi
gla
scsh
red warszawa
skeletal muscle
santo cilauro
lijiang river
john colvin
tanintharyi
william tryon