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

Compare the price elasticity at two parallel demand curves, Compare the pri...

Compare the price elasticity at two parallel demand curves at a given price. This has been explained in Fig above where two demand curves AB and CD are given that are parallel to e

Game theory, game theory matrix dominant strategy

game theory matrix dominant strategy

Type of economic system, Question 1: (a) Briefly explain and distingui...

Question 1: (a) Briefly explain and distinguish between a centrally planned, laissez-faire and mixed economy. (b) According to you, which kind of economic system is most d

Direct action, Direct Action Direct action in more than one from has be...

Direct Action Direct action in more than one from has been employed by the central banks either as an alternative to their discount rate policy or open market operations or tog

Cost Analysis, Michael was discussing the importance of production analysis...

Michael was discussing the importance of production analysis and cost analysis to managerial economics with a final year Open Campus student. The final year student, Catherine, sta

Short-term policies to cure balance of payment deficits, Short-Term Policie...

Short-Term Policies Deflation is a policy of reducing expenditure with the intention of curing a deficit by reducing the demand for imports.  This reduction of expenditure m

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

examine the endogenous and exogenous determinants of money supply

Floating exchange rate system, 1. The price of a U. S. produced hammer is $...

1. The price of a U. S. produced hammer is $5. The exchange rate with Malaysia is 3 Ringgit/1$. What is the current price of the hammer in Malaysia? (Assume no transportation cost.

Elasticity.., elasticity concepts occupies a central place in policy formul...

elasticity concepts occupies a central place in policy formulation explain in details

Illustrate fiscal monopoly, Q. Illustrate Fiscal Monopoly? Fiscal Mono...

Q. Illustrate Fiscal Monopoly? Fiscal Monopoly:   To stop exploitation of consumers andemployees, government nationalises many industries and obtains fiscal monopoly power ove

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