Short Notes on Terms of trade (TOT)
Posted by Ripon Abu Hasnat on Tuesday, September 16, 2014 | 0 comments
Terms of trade (TOT) 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.
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.
The
term (barter) terms of trade was first coined by the US American
economist Frank William Taussig in his 1927 book International Trade.
However, an earlier version of the concept can be traced back to the English
economist Robert Torrens and his book The Budget: On Commercial and Colonial
Policy, published in 1844, as well as to John Stuart Mill's essay Of the
Laws of Interchange between Nations; and the Distribution of Gains of Commerce
among the Countries of the Commercial World, published in the same year,
though allegedly already written in 1829/30.
Terms
of trade (TOT) is a measure of how much imports an economy can get for a unit
of export 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 over
the price of oranges. In other words, how many oranges can you get 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.
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