Terms of trade, Managerial Economics

Assignment Help:

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.


Related Discussions:- Terms of trade

Budget, THE BUDGET The budget is a summary statement indicating the es...

THE BUDGET The budget is a summary statement indicating the estimated amount of revenue that the government requires and hopes to raise.  It also indicates the various sources

Describe about the theory of profit, Describe about the Theory of profit ...

Describe about the Theory of profit Every industrial and business enterprise aims at maximising profit. Profit is the difference between total economic cost and totalrevenue. P

What is difference between monopoly and perfect competition, What is the di...

What is the difference between monopoly and perfect competition? Monopoly versus Perfect Competition: 1. Perfect competition is equal to monopoly competition, at the perfe

Fundamental concepts of decision-making theory, fundamental concepts of dec...

fundamental concepts of decision-making theory The fundamental concepts of decision-making theory have been culled from microeconomic theory and have been furnished with new t

Income elasticity of demand, Income elasticity of demand The income el...

Income elasticity of demand The income elasticity of demand measures the degree of responsiveness of the quantity demanded of a product to changes in income.  Its co-efficient

Money supply, examine the endogenous and exogenous determinants of money su...

examine the endogenous and exogenous determinants of money supply

Income elasticity and cross price elasticity, Question: (a) As an advis...

Question: (a) As an advisor to government as well as that to a firm how will you make use of your knowledge on price elasticity of demand, income elasticity and cross price ela

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd