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

What is the reasons for shift in demand curve, Reasons for Shift in Demand ...

Reasons for Shift in Demand Curve Shifts in a price-demand curve may occur due to the change in one or more of other determinants of demand. Consider, for illustration, decreas

Demand for money, Demand for money   The demand for money is a more d...

Demand for money   The demand for money is a more difficult concept than the demand for goods and services.  It refers to the desire to hold one's assets as money rather tha

How government intervenes to improve allocation of resources, Problem 1: ...

Problem 1: You are the manager of a reputed five star hotel in Mauritius and you have been asked by the director of the hotel to advise on possible pricing strategies to increa

Structural unemployment, a)      In 1948, the money GNP was $520 billion an...

a)      In 1948, the money GNP was $520 billion and the price index was 120.  In order to   make the 1948 GNP comparable with the base year, the 1948 GNP must be adjusted    to:

HHI, Suppose Fiat recently entered into an Agreement and Plan of Merger wit...

Suppose Fiat recently entered into an Agreement and Plan of Merger with Case for $4.3 billion. Prior to the merger, the market for four-wheel- Drive tractors consisted of five firm

Externality in economics, Explain the concept of externality in economics? ...

Explain the concept of externality in economics? Give one example of a positive and a  negative externality in Australia.

Discouting priciple, Using the discounting principle calculate the present ...

Using the discounting principle calculate the present value of an annuity of five years at Rs. 500 payments made at the end of each of the next five years at 10% interest. stion..

Discuss profit maximizing model in detail, Question 1. Discuss the practic...

Question 1. Discuss the practical application of Price elasticity and Income elasticity of demand Question 2. Discuss profit maximizing model in detail Question 3. Descr

Plot the demand schedule and draw the demand curve for the d, Plot the dema...

Plot the demand schedule and draw the demand curve for the data given for Marijuana in the caseabove.

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