Terms Of Trade Essay

967 words - 4 pages

In international economics and international trade, terms of trade or TOT is (Price Exports)/(Price Imports). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is not affected by the exchange rate because a rise in the value of a country's currency ...view middle of the document...

0 to 0.7), it has experienced a 30% deterioration in its 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 countries.

Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100
[edit] Multi-commodity multi-country model

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.

{{p_x^c\, q_x^0}\over{p_x^0\, q_x^0}} \left/ {{p_m^c\, q_m^0}\over{p_m^0\, q_m^0}}\right.

Where

p_x^c=price of exports in the current period

q_x^0= quantity of exports in the base period

p_x^0= price of exports in the base period

p_m^c= price of imports in the current period

q_m^0= quantity of imports in the base period

p_m^0= price of imports in the base period

Basically: Export Price Over Import price times 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation) If the percentage is under 100% then your economy is not going well (More money going out than coming in)
[edit] Limitations

Terms of trade should not be used as synonymous with social...

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