terms of trade

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Terms of trade

The weighted average of a nation's export prices relative to its import prices.

Terms of Trade

1. The conditions the parties agree to follow in the trade of a security. Necessary terms of trade include the price and the number of shares or bonds traded. The terms of trade may also include special conditions.

2. In international trade, the difference between price indices on imports and exports.

3. See: Balance of trade.
Terms of tradeclick for a larger image
Fig. 183 Terms of trade. See entry. Source: Office for National Statistics, 2004.

terms of trade

a PRICE INDEX that shows a country's EXPORT prices relative to its IMPORT prices. It is constructed by taking an index of prices received for exports, on the one hand, and an index of prices paid for imports, on the other, and then dividing the first by the second (see Fig. 183 ). An improvement in a country's terms of trade occurs if its export prices rise at a faster rate than import prices over time and a worsening of the terms of trade if export prices rise more slowly than import prices; or, vice-versa, if export prices fall at a slower rate than import prices (as in Fig. 183), then the terms of trade are improved.

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. A critical factor in this regard, however, is the PRICE- ELASTICITY OF DEMAND for exports and imports. If, for example, export demand is price-elastic, then price rises (which make the country's exports less competitive in world markets) will result in a more than proportionate fall in export volume, thus lowering foreign-exchange receipts and adversely affecting domestic output and employment. See also BALANCE OF PAYMENTS EQUILIBRIUM, DEVALUATION, REVALUATION.

References in periodicals archive ?
Its effects have extended to Latin America through higher prices of commodities and favorable terms of trade in the last decade.
Labour's terms of trade improved slightly from 1961 to 2007, but this improvement concealed major shifts within the period (Table 2 and Chart 4).
Two, what adjustments in the terms of trade do the conditions of balance (internal as well as external) imply?
Bahmani-Oskooee and Kutan (2007) find that over time, competitiveness, measured by terms of trade fluctuations, has played a much more important role as inflation was controlled and price convergence with the European Union (EU) is achieved.
Pages 56-57 of my paper carefully explain the cause of the terms of trade result.
The surplus in the balance of trade will decrease in 2005 and 2006 as the terms of trade deteriorate, but then increase in 2007 as both the terms of trade and net exports improve.
Giancarlo Corsetti, European University; Philippe Martin, University of Paris-1 Pantheon Sorbonne; and Paolo Pesenti, Federal Reserve Bank of New York, "Productivity Spillovers, Terms of Trade, and the Home Market Effect" Discussant: Mark Melitz, NBER and Harvard University
This would logically be reflected in the improving terms of trade of commodity-producing countries (which is to say, the ratio of their unit export prices to unit import prices).
The two countries most affected by the dramatically shifting terms of trade between grain and oil are the United States and Saudi Arabia.
Through it all, the developing Asian nations were content to maintain their favorable terms of trade with the targeted American market.
Accordingly, output and consumption increase strongly in the euro area; in the rest of the industrialized world, output increases somewhat, and consumption increases more than output because of an improvement in the terms of trade.
Using a simple macroeconomic model tailored to the Saudi Arabian economy and a structural vendor autoregression (VAR), the authors assess the role of terms of trade, supply, trade balance, aggregate demand, and monetary shocks in macroeconomic fluctuations in Saudi Arabia.