terms of trade

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Terms of trade

The weighted average of a nation's export prices relative to its import prices.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
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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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
More importantly, terms of trade fluctuations in seven countries seem to have a predictable pattern with respect to movements in trade balance.
The range of these elasticities (-4.0 to -5.0) imply that a 4 per cent expansion in exports (the year 2025 result in my paper) will cause a terms of trade decline of between 0.8 per cent (for an elasticity of -5) and 1 per cent (for an elasticity of-4).
Table 16 Terms of Trade Annual percentage change 2004 2005 2006 2007 Manufactured products 0.0 0.5 -1.4 -0.6 Primary products -2.9 -6.8 4.00 2.6 Services -0.7 0.00 -0.4 -0.1 Total -0.9 -1.5 -0.5 0.3 Sources: Statistics Sweden and NIER.
(4) Moreover, due to exogenous changes in terms of trade, [b.sub.t] represents exogenous increases in net exports.
As shown by Figure 1, New Zealand's terms of trade have improved by approximately 24% over the past 15 years.
Under the assumption that goods are normal, each country's tariff revenue increases with its terms of trade. Having now expressed tariff revenue as a function of local and world prices, we may also express national consumption as a function of local and world prices: [C.sub.i](p,[p.sup.w]) [equivalent to] [D.sub.i](p,R(p,[p.sup.w])) and [C.sup.*.sub.i]([p.sup.*],[p.sup.w]) [equivalent to] [D.sup.*.sub.i]([p.sup.*],[R.sup.*]([p.sup.*],[p.sup.w])) for I = {x,y}.
The terms of trade within the domestic economy could be defined as the prices of goods produced by skilled workers relative to the prices of goods produced by less-skilled workers.
The terms of trade [p.sub.1] for nations A and B are determined from the market clearing equation (equation (5)) below:
Proposition 1 With trade taxes, the impact of an export promotion zone on welfare depends on a factor terms of trade effect and a volume of trade effect.
Each curve shows alternative quantities of imports demanded and exports supplied at all price ratios or terms of trade.
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Effective Exchange Rate is an important tool in macroeconomic analysis as it helps gauge the country's relative position with respect to other nations in terms of trade competitiveness.