Terms of trade Terms of trade measures the relationship between the prices a country gets for its exports

and the prices it pays for its imports. What can affect terms of trade: Changes in consumer taste patterns over time Diversion of trade by countries for various reasons Policy of import substitution by countries Elasticity conditions of demand and supply of imports / exports Competition among countries in trade Tariff and non-tariff measures Rate of exchange Demand and supply conditions in countries due to changes in national income Concepts of Terms of Trade: i. Gross Barter Terms of Trade: This way of denoting terms of trade is: Dividing Import Quantity Index by Export Quality Index and multiplying it by 100 to remove the decimal. Illustration: Base year 2010: 100 x 100 = 100 100 2011 : 120 x 100 = 120 (improvement) 100 2012 : 100 x 100 = 83.3 (deterioration) 120 ii. Net Barter or Commodity Terms of Trade: It is calculated by : Export Price Index x 100 Import price Index

Illustration : Base year 2010 : 100 x 100 = 100 100 2011 : 120 x 100 = 120 (improvement) 100 2012 : 100 x 100 = 83.33 (deterioration) 120 This is the most commonly and universally used expression for terms of trade changes. Other concepts: (more of theoretical value) iii. Income Terms of Trade: Export Price Index x Export Quantity Index Import Price Index Illustration: Base year 2010 : 100 x 100 = 100 100 2011 : 90 x 120 = 108 (improvement) 100 2012 : 110 x 80 = 88 (deterioration) 100 iv. Single Factoral Terms of Trade: Export Price Index x Export Productivity Index Import Price Index

Illustration: Base year 2010 : 100 x 100 = 100 100 2011 : 90 x 100 = 90 (deterioration) 100 2012 : 90 x 120 = 108 (improvement) 100

v. Double Factoral Terms of Trade: Export Price Index Import Price Index x Export Productivity Index Import Productivity Index

This is an elusive concept. Difficulties of the measurement as described reduces the practical utility of these terms of trade. vi. Real Cost Terms of Trade: Export Price Index Import Price Index x Export Productivity Index Real cost of producing export goods

A highly subjective concept, with little practical utility. vii. Utility Terms of Trade: Real cost terms of trade is corrected for the relative desirability of imports and of the foregone consumption of domestic goods in export production. This concept focuses on the real cost trade index showing average utility per unit of imported commodities and of domestic commodities whose internal consumption is prevented by use of resources for export. It is an improvement on the Real Cost Terms of Trade. Also of limited practical value.