Volume of trade, Microeconomics

Volume of Trade:

It relates to the size of international transactions. Since a large number of commodities enter in international transactions and their aggregate can be found only by finding their money value, the volume of trade can be measured by finding the value. The trends in the value of trade help to identify the basic forces that may be operating at different periods in the economy. However, mere absolute changes in the value of trade may not be satisfactory guide, hence it is necessary to find the changes in the value of trade by relating them to two variables, viz., 

•  Share of exports/imports in GDP, and 

•  Share of exports/imports in world trade. 

The share of exports/imports in GDP indicates the degree of outward-orientation or openness of the economy in regard to the trade activity. This share reflects in a broad way the nature of trade strategies adopted in the country. The ratio of exports to GDP could be interpreted also to mean supply capability of the economy in regard to exports. It can be called as  average propensity to export.

The similar ratio between imports and GDP gives the average propensity to import. Clearly, however, the appropriate share of exports in output under an efficient allocation of resources will be less in bigger economies than in smaller economies. The share of exports in the world trade indicates the importance of the country as a nation in the world economy. It reflects the market thrust that the country is able to realise in presence of the various competitors in the world market. Changes in this ratio, thus, indicate the shift in the position of the comparative advantage of the country. 

Further, changes in the value of exports may be compared to the changes in the value of imports. The relationship between these two variables is known as the  terms of trade (TT), i.e., the terms at which exports exchange for imports; if the exports value in terms of imports value shows an increase, the TT are said to be favourable. Favourable TT imply that for a given value of exports, the country can produce more of imports. Conversely, if the TT are unfavourable a country has to give up more exports to produce a given volume of imports.

Posted Date: 11/15/2012 12:16:39 AM | Location : United States

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