Copyright © Philip M. Parker, INSEAD. Terms of Use.
| Domain | Definition |
Business | The relationship between the prices of exports and the prices of imports. The usual method of calculating the terms of trade is by dividing the implicit price deflator for exports by the implicit price deflator for imports. Source: European Union. (references) |
Economics | The ratio of the index of export prices to the index of import prices. (Note the difference from "Trade Terms" (references) |
Labor | Allocation of inputs into two or more economies that take advantage of differences in comparative advantages and, through specialization, improve the production of the economies. Note that a change in the terms of trade should cause all domestic production to change (i.e. re-allocates all inputs), rather than just imports. (references) |
Source: compiled by the editor from various references; see credits. | |
(From Wikipedia, the free Encyclopedia)
In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the price a country must pay for it’s import commodity to the price it receives for it’s export commodity. In this simple case the imports of one country are the exports of the other country. For example, if a country exports 100 dollars worth of export product in exchange for 50 dollars worth of imported product, that country’s terms of trade are 100/50 = 2. The terms of trade for the other country must be the reciprocal (50/100 = .5). When this number is falling, the country is said to have “deteriorating terms of trade”. If multiplied by 100, these calculations can be expressed as a percent (200% and 50% respectively). If a country’s terms of trade fall from say 100% to 70% (from 1.0 to .7), it has experienced a 30% deterioation in it’s terms of trade. When doing longitudinal (time series) calculations, it is common to set the base year to 100% to make interpretation of the results easier.
In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyre’s index. In this case, a nation’s terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.
Terms of trade should not be used as synonymous with social welfare, or even Pareto economic welfare. Terms of trade calculations do not tell us about the volume of the countries’ exports, only relative changes between countries. To understand a county’s social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.
In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. The possibility of errors is significant.
Two country model
Multi-commodity multi-country model
Where:
=price of exports in the current period
=quantity of exports in the base period
=price of exports in the base period
=price of imports in the current period
=quantity of imports in the base period
=price of imports in the base period
Other terms of trade calculations
Limitations
See Also:
Finding related topics
External sources
Source: adapted by the editor from Wikipedia, the free encyclopedia under a copyleft GNU Free Documentation License (GFDL) from the article "Terms of trade."
Crosswords: TERMS OF TRADE |
| Specialty definitions using "TERMS OF TRADE": Bargaining association ♦ Terms of Sale. (references) |
| Subject | Topic | Quote |
Business | The terms of trade marginally deteriorated as a result of higher import prices for equipment. (references) | |
Economic History | Uae | The UAE consistently ranks among the US's top 10 trading partners in terms of trade balance. (references) |
Zimbabwe | Caught in a domestic debt trap, the country has seen a decline in terms of trade and in confidence in its prospects. (references) | |
Kenya | Inappropriate agricultural policies, inadequate credit, and poor international terms of trade contributed to the decline in agriculture. (references) | |
Political Economy | GHANA | Despite several years of economic reform the country still remains vulnerable to terms of trade shocks. (references) |
ITALY | Consumer inflation accelerated from 1.7 percent in 1999 to 2.5 percent for 2000, fueled by higher oil prices, a weakening euro and worsening of terms of trade. (references) | |
GHANA | These factors led to a severe shortage of foreign exchange, rapid depreciation of the cedi against the dollar by about 60 percent, and an upsurge of inflation from 14 percent at the end of December 1999 to 41 percent at the end of December 2000. Imbalances caused by the terms of trade shocks were further exacerbated by heavy government spending and borrowing in the run-up to the December 2000 elections. (references) | |
Trade | Turkey | In terms of trade finance, treasury operations, electronic banking, and information management, the dozen leading Turkish banks are as sophisticated as their other OECD counterparts. (references) |
Azerbaijan | Western commercial lenders are still hesitant about the region following the Russian financial crisis of August 1998. The relative volatility of the Caucasus region, combined with the undercapitalization of the Azeri banking sector, puts a further squeeze on availability and terms of trade and project finance. (references) | |
Source: compiled by the editor from ICON Group International, Inc.; see credits. | ||
| The following statistics estimate the number of searches per day across the major English-language search engines as identified by various trade publications. Hyperlinks lead to commercial use of the expression at Amazon.com. |
| Expression | Frequency per Day |
terms of trade | 15 |
| Source: compiled by the editor from various references; see credits. | |
| Language | Translations for "TERMS OF TRADE"; alternative meanings/domain in parentheses. | ||||||||||||||||
Danish | bytteforholdet, bytteforhold. (various references) | ||||||||||||||||
Dutch | ruilvoet. (various references) | ||||||||||||||||
Finnish | ulkomaankaupan vaihtosuhteet. (various references) | ||||||||||||||||
French | termes de l'échange. (various references) | ||||||||||||||||
German | Terms of Trade, internationale Austauschverhaeltnisse, Geschäftsbedingungen (business conditions, conditions of trading, terms of business), Austauschrelation. (various references) | ||||||||||||||||
Greek | όροι εμπορίου, εμπορικοί όροι. (various references) | ||||||||||||||||
Hungarian | külkereskedelmi cserearányok, cserearány. (various references) | ||||||||||||||||
Italian | ragioni di scambio. (various references) | ||||||||||||||||
Pig Latin | ermstay ofay adetray termos de troca, razões de troca. (various references) términos del intercambio, relaciones de intercambio. (various references) | ||||||||||||||||
Scrabble® Enable2K-Verified Anagrams | |
| Words within the letters "a-d-e-e-f-m-o-r-r-s-t-t" | |
-1 letter: reformatted. | |
-2 letters: foretasted, formatters, reformates, rotameters, trematodes. | |
-3 letters: aftermost, defoamers, deformers, defroster, forearmed, foredates, foretaste, formatted, formatter, moderates, reformate, reformats, restarted, rotameter, smattered, smatterer, tetramers, trematode. | |
-4 letters: arrested, defamers, defoamer, deforest, deformer, draftees, drafters, dreamers, fearsome, ferrates, forearms, foredate, foremast, forested, forester, formates, fostered, fosterer, freedoms, fretsome, fretters, mastered, mattered, moderate, modester, mofettes, mortared. | |
| Words containing the letters "a-d-e-e-f-m-o-r-r-s-t-t" | |
+3 letters: diffractometers. | |
+4 letters: diffractometries. | |
| Source: compiled by the editor from various references; see credits. SCRABBLE® is a registered trademark. All intellectual property rights in and to the game are owned in the U.S.A and Canada by Hasbro Inc., and throughout the rest of the world by J.W. Spear & Sons Limited of Maidenhead, Berkshire, England, a subsidiary of Mattel Inc. Mattel and Spear are not affiliated with Hasbro. | |
| 1. Crosswords 2. Quotations: Non-fiction 3. Expressions: Internet 4. Translations: Modern | 5. Anagrams 6. Bibliography |
Copyright © Philip M. Parker, INSEAD. Terms of Use.
