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.
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.
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
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
Tn = Net Barter Terms of Trade
Px = Index number of export prices
Pm = Index number of import prices
This is used to measure the gain from international trade. If ‘Tn’ is greater than 100, then it is a favourable terms of trade which will mean that for a rupee of export, more of imports can be received by a country.
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.
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
Viner has devised another concept called ‘‘the single factoral terms of trade’’ as an improvement upon the commodity terms of trade. It represents the ratio of export-price index to the import-price index adjusted for changes in the productivity of a country’s factors in the production of exports. Symbolically, it can be stated as
Tf = (Px / Pm) Fx
Where, Tf stands for single factoral terms of trade index. Fx stands for productivity in exports (which is measured as the index of cost in terms of quantity of factors of production used per unit of export).
Viner constructed another index 1called ‘‘Double factoral terms of Trade’’. It is expressed as
Tff = (Px / Pm) (Fx / Fm)
which takes into account the productivity in country’s exports, as well as the productivity of foreign factors. Here, Fm represents import index (which is measured as the index of cost in terms of quantity of factors of production employed per unit of imports).