Terms of Trade | International trade

Definition of Terms of Trade:

A terms of trade refers to the rate of which the goods of one country is exchange for the goods of another country during a given periods of time. In other words, it is a measure of purchasing power of export of a country in terms of its import. When the exports prices of the a country rises relatively to its import prices then the terms of trade of that country said to be and vice versa.

Types of Terms of Trade:

Different economist have given various concept of terms of trade which are discussed below-

(i) Commodity terms of trade or Net barter terms of trade: Commodity terms of trade or Net barter of terms of trade was first given by F.W Taussig. Commodity or Net barter terms of trade is the ratio between the prices of the country's export goods or commodity and import goods or commodity. Symbolically.

Tc=Px/Pm

Where,

Tc= Commodity terms of trade

Px= Export price and

Pm=Import price.

To measure change in the commodity terms of trade over a period, the ratio of change in export price to the import price is taken that is-

Tc=Px¹/Px0/Pm¹/Pm0×100

(ii) Gross Barter terms of trade: This concept (Gross Barter terms of trade) is also given by F.W Taussig. The gross barter terms of trade is the ratio between the physical quantities of import and export. Symbolically-

Tg=Qm/Qx

Where,

Tg= Gross Barter terms of trade

Qm= Quantity of import 

Qx= Quantity of export

Higher the ratio between quantities of import and export, better the gross barter terms of trade and vice versa. To measure changes in gross barter terms of trade over a period, the following formula can be used-

Tg= Qm¹/Qm0/Qx¹/Qx0×100  (Note- x0 and m0=0 show naught)

(iii) Income terms of trade: This concept of income terms of trade was developed by G.S Dorrance and H. Satchel. The concept is the improvement upon the net barter terms of trade. It takes into the account of indices of exports and imports prices and quantity index of exports. This terms of trade is determined by the product of net barter terms of trade and the quantity index of exports. It can be expressed as below-

Ty= Tc.Qx

Or

Ty= Px/Pm×Qx

(iv) Single factoral terms of trade: Single factoral terms of trade was given or developed by Jacob Viber. It's determined by multiplying the commodity terms of trade with the productivity index in the domestic exports sector. It can be expressed as below-

Tb= Tc.Zx

Where,

Zx= Export productivity index.

(v) Double factoral terms of trade: The concept of double factoral terms of trade, formulated by Jacob Viner takes into account the change in factor productivity both in the domestic exports industry and exports industry of the foreign countries. This concept can be expressed as-

Td=Tc.Zx/Zm.

(vi) Real cost terms of trade: According to Jacob Viner the increase production of export goods or commodity requires the transfer of diversion of productive resources from other sector to the export sector. The amount of utility cost or sacrificed per unit of resources employed in the production of export goods or commodity constitutes the real cost of producing exports.

The real terms of trade can be measured by multiplying the single factoral terms of trade by the index of the amount disutility per unit of the resources employed in producing exports goods or commodity. The real cost terms of trade can be expressed as below-

Tr=Tb.Rx

Where,

Rx= Index of the amount of disutility suffered per unit of resources employed in the producing export goods or commodity.

(vii) Utility terms of trade: Utility terms of trade is defined as the product of real cost terms of trade and relative utility of imports and domestic goods or commodity foregone. Therefore, such trade is defined as-

Tu= TR.U

Where,

U= Index of relative utility of imports and domestic goods or commodity foregone.