it deals Terms of Trade - Types - Factors Influencing Terms of Trade

1. Terms of Trade
The gains from international trade depend upon the terms of trade which refers to the ratio
of export prices to import prices.

2. Meaning
Meaning
• It is the rate at which the goods of one country are exchanged for goods of
another country. It is expressed as the relation between export prices and
import prices. Terms of trade improves when average price of exports is higher
than average price of imports

3. Types of Terms of Trade
• The different concepts of terms of trade were classified by Gerald M.Meier
into the following three categories.
• Terms of Trade related to the Ratio of Exchange between Commodities

4. Net Barter Terms of Trade
• This type was developed by Taussig in 1927.The ratio between the prices of exports
and of imports is called the “net barter terms of trade’. It is named by Viner as the
‘commodity terms of trade’.
• It is expressed as:
• Tn= (Px / Pm) x 100
• Where,
• Tn = Net Barter Terms of Trade
• Px = Index number of export prices
• Pm = Index number of import prices

5. 2 Gross Barter Terms of Trade
• This was developed by Taussig in 1927 as an improvement over the net terms
of trade. It is an index of relationship between total physical quantity of
imports and the total physical quantity of exports.
• Tg = (Qm/Qx) x 100
• Where, Qm = Index of import quantities
• Qx = Index of export quantities
• If for a given quantity of export, more quantity of import can be consumed by
a country, then one can say that terms of trade are favourable.

6. 3 Income Terms of Trade
• The income terms of trade was given by G.S.Dorrance in 1948. It is the index of
the value of exports divided by the price index for imports multiplied by quantity
index of experts. In other words, it is the net barter terms of trade of a country
multiplied by its exports-volume index.
Ty = (Px / Pm)Qx
Where, Px = Price index of exports
Pm = Price index of imports
Qx = Quantity index of exports

7. Factors Influencing Terms of Trade
• Elasticity of Demand for exports and imports
• Nature of Supply
• Nature of production
• Size of a country
• Size of the population
• Rate of Exchange
• Trade policy

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