Terms of traade
The terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other. For international trade to be mutually beneficial for each country, the terms of trade must lie within the opportunity cost ratios for both country. We calculate the terms of trade as an index number using the following formula:
ToT = 100 x Average export price index / Average import price index
If export prices are rising faster than import prices, the terms of trade index will rise. This means that fewer exports have to be given up in exchange for a given volume of imports. If import prices rise faster than export prices, the terms of trade have deteriorated. A greater volume of exports has to be sold to finance a given amount of imported goods and services.The terms of trade fluctuate in line with changes in export and import prices. Clearly the exchange rate and the rate of inflation can both influence the direction of any change in the terms of trade.
Also Terms of trade can be define as an index of the price of a country's exports in terms of its imports. The terms of trade are said to improve if that index rises, According to Obstfeld and Rogoff, p 25.
An analogous use is when comparing relative prices. If the cost of agricultural goods in terms of industrial goods goes up, one might say the "terms of trade ... shifted in favor of agricultural products." (North and Thomas, p 108).
About.comEconomics
Definition of 'Terms of Trade - TOT'
The value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports).
ToT = 100 x Average export price index / Average import price index
If export prices are rising faster than import prices, the terms of trade index will rise. This means that fewer exports have to be given up in exchange for a given volume of imports. If import prices rise faster than export prices, the terms of trade have deteriorated. A greater volume of exports has to be sold to finance a given amount of imported goods and services.The terms of trade fluctuate in line with changes in export and import prices. Clearly the exchange rate and the rate of inflation can both influence the direction of any change in the terms of trade.
Also Terms of trade can be define as an index of the price of a country's exports in terms of its imports. The terms of trade are said to improve if that index rises, According to Obstfeld and Rogoff, p 25.
An analogous use is when comparing relative prices. If the cost of agricultural goods in terms of industrial goods goes up, one might say the "terms of trade ... shifted in favor of agricultural products." (North and Thomas, p 108).
About.comEconomics
Definition of 'Terms of Trade - TOT'
The value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports).