An improvement of a nation's terms of trade benefits that country in the sense that it can buy more imports for any given level of exports. The terms of trade may be influenced by the exchange rate because a rise in the value of a country's currency lowers the domestic prices of its imports but may not directly affect the prices of the commodities it exports.
However, an earlier version of the concept can be traced back to the English economist Robert Torrens and his book The Budget: Terms of trade TOT is a measure of how much imports an economy can get for a unit of exported goods. For example, if an economy is only exporting apples and only importing oranges, then the terms of trade are simply the price of apples divided by the price of oranges — in other words, how many oranges can be obtained for a unit of apples.
Since economies typically export and import many goods, measuring the TOT requires defining price indices for exported and imported goods and comparing the two.
A rise in the prices of exported goods in international markets would increase the TOT, while a rise in the prices of imported goods would decrease it. For example, countries that export oil will see an increase in their TOT when oil prices go up, while the TOT of countries that import oil would decrease. In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the total export revenue [ clarification needed ] a country receives for its export commodity to the total import revenue it pays for its import commodity.
In this case the imports of one country are the exports of the other country. When this number is falling, the country is said to have "deteriorating terms of trade". When doing longitudinal time series calculations, it is common to set a value for the base year [ citation needed ] to make interpretation of the results easier. In basic microeconomics , the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two nations.
Terms of trade is the ratio of a country's export price index to its import price index, multiplied by The terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other. In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres 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 how a country'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.
The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country. If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve.
However, this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports.
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What are 'Terms of Trade - TOT'? Terms of trade represent the ratio between a country's export prices and its import prices. The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by
In economics, terms of trade (TOT) refer to the relationship between how much money a country pays for its imports and how much it brings in from exports. When the price of a country's exports increases over the price of its imports, economists say that the terms of trade has moved in a positive direction.
Terms of trade definition is - the ratio between the prices of two countries participating in international trade. Terms of trade refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.
Terms of trade definition at hoursofentertainment.tk, a free online dictionary with pronunciation, synonyms and translation. Look it up now! Superficially, an improvement in a country's terms of trade may be considered to be beneficial: in foreign-exchange terms, a given amount of exports will now finance the purchase of a greater amount of imports, or, put another way, a given amount of imports can now be purchased for a smaller amount of exports.