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

Explain measuring arc elasticity, The concept of point elasticity is applic...

The concept of point elasticity is applicable where change in price and the resulting change in quantity are infinite or small. Though, where change in price and consequent hunger

Excise tax and its impact on manufacturing industry, excise tax and its imp...

excise tax and its impact on manufacturing industry with respect to demand and supply curves

Disadvantages of product differentiation , Disadvantages of product differe...

Disadvantages of product differentiation   a) Product differentiation generally reduces the degree of competition in the market.  It does this in two ways:          i.

Function of money markets, Function of Money Markets The money markets...

Function of Money Markets The money markets are the place where money is "wholesaled".  As such the supply of money and interest rate which are of significance to the whole ec

Definition of oligopoly, Mrs John Robinson- 'Oligopoly is market situation ...

Mrs John Robinson- 'Oligopoly is market situation in between monopoly and perfect competition in which the number of sellers is more than one but is not so large that the market pr

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

Applications of managerial theories and concepts in decision, Discuss the a...

Discuss the applications of Managerial economics concepts or theories in managerial decision making question..

Reasons for fluctuations in agricultural prices, REASONS FOR FLUCTUATIONS I...

REASONS FOR FLUCTUATIONS IN AGRICULTURAL PRICES Production depends on factors beyond the control of the producers e.g. weather, disease and pests.  Actual and planned output i

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