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 importsand 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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