Terms of trade, Managerial Economics

TERMS OF TRADE

The relation between the prices of a country's exports and the prices of its imports, represented arithmetically by taking the export index as a percentage of the import index.  In the comparative cost model, terms of trade were, defined as the international exchange ratio between a country's export good and its import good.  This is the barter terms of trade which measures the quantity of exports which have to be sacrificed to obtain a unit of imports and is easily calculated when there are just two goods traded.  But in practice, countries trade hundreds of different goods and services and the concept of the terms of trade becomes more complex.  Estimates of the terms of trade are usually made by calculating an index of import prices; this gives an index of the term of trade:

Terms of trade index = Export Price Index    x  100

                                          Import Price Index

Thus, the price indices are essentially weighted averages of export and import pries.  If these are set at 100 in the same base year, say, 1990, then the terms of trade index is also 100.  If, for instance, import prices fall relative to  export prices, the terms of trade will rise above 100, the terms of trade then being said to be more favourable to the country concerned since it means that it can obtain more goods from abroad than before in exchange for a given quantity of exports.  On the other hand, if the terms of trade become unfavourable, the terms of trade index will fall below 100.

A rise in terms of trade index is usually described as an "improvement" or as "favourable" on the grounds that a rise in export prices relative to import prices theoretically means that a country can now buy the same quantity of imports for the sacrifice of less export (or it can have more imports for the same volume of exports).  Similarly, a fall in the terms of trade index is a "deterioration" or is an "unfavourable" movement.

Posted Date: 11/30/2012 5:04:58 AM | Location : United States







Related Discussions:- Terms of trade, Assignment Help, Ask Question on Terms of trade, Get Answer, Expert's Help, Terms of trade Discussions

Write discussion on Terms of trade
Your posts are moderated
Related Questions
Q. Loss at the point of equilibrium? Losses: At the point of equilibrium i.e. E where MR = MC, firm produces OM amount of the output. To produce this output, firm incurs an a

Q. Define the Natural Monopoly? Natural Monopoly: Natural monopoly is because of natural factors. For illustration, a particular raw material is concentrated at a specific pl

MONOPOLISTIC PRACTICES The following practices may be said to characterize monopolies. Exclusive dealing to supply and collective boycott Producers agree to supply onl

PROBLEMS OF USING PER CAPITA INCOME TO COMPARE STANDARD OF LIVING OVER TIME 1)       The composition of output may change. e.g. more defence-related goods may be produced and

Question 1: (a) Describe how asymmetric information influences the price system and resource allocation. Provide examples to support your answer. (b) Managerial decision-ma

Illustrate the concept of present value. The Concept of Present Value: While someone borrows money for a year, there the interest rate is the price, computed as a percent

Perfect Competition   The model of perfect competition describes a market situation in which there are: i.         Many buyers and sellers to the extent that the supply of

Number 1 work: Week 4 Discussion - Empirical Demand Function and Forecasting The empirical demand function can be used in conjunction with historical data to predict pricing and


Advantages a.           It is more equitable.  The broader shoulders are asked to carry the heavier burden. b.          It satisfies the canon of productivity as it yields