Terms of trade.

In international economics and international trade, terms of trade or TOT is the relative prices of a country's export to import. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it has to pay less for the products it imports. That is, it has to give up fewer exports for the imports it receives.

 

In the simplified case of two countries and two commodities (two different goods), terms of trade is defined as the ratio of the price a country receives for its export good to the price it pays for its import good. In this simple case the imports of one country are the exports of the other country. For example, if a country exports 50 dollars worth of product in exchange for 100 dollars worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30% deterioration (declining)  in its terms of trade. When doing longitudinal (time series) calculations, it is common to set the base year[citation needed] to make interpretation of the results easier.

 

In basic Microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two countries.

 

Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100

In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres index. In this case, a nation's terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.

  Where

price of exports in the current period

 quantity of exports in the base period

 price of exports in the base period

 price of imports in the current period

 quantity of imports in the base period

 price of imports in the base period

 

Basically: Export Price Over Import price times 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation) If the percentage is under 100% then your economy is not going well (More money going out then coming in)

 

Other terms-of-trade calculations

The net barter terms of trade is the ratio (expressed as a percentage) of relative export and import prices when volume is held constant.

The gross barter terms of trade is the ratio (expressed as a percent) of a quantity index of exports to a quantity index of inputs.

The income terms of trade is the ratio (expressed as a percent) of the value of exports to the price of imports.

The single factorial terms of trade is the net barter terms of trade adjusted for changes in the productivity of exports.

The double factorial terms of trade adjusts for both the productivity of exports and the productivity of imports.