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    Unit - 3 Terms of Trade Types

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    Aashik k Xavier
    Terms of trade (TOT) refer to the ratio of a country's export prices to its import prices. This indicates how much a country must pay for imports in terms of its exports. There are several concepts of terms of trade, including net barter TOT (the basic ratio of export to import prices), gross barter TOT (the ratio of import and export quantities), and income TOT (net barter TOT multiplied by export quantity). Other concepts incorporate productivity indexes, real costs of production, and relative utility of imports versus domestic goods. Calculating different versions of terms of trade provides information about a country's trade balance and economic well-being over time.

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    Unit - 3 Terms of Trade Types

    Uploaded by

    Aashik k Xavier
    111 views4 pages
    Terms of trade (TOT) refer to the ratio of a country's export prices to its import prices. This indicates how much a country must pay for imports in terms of its exports. There are several concepts of terms of trade, including net barter TOT (the basic ratio of export to import prices), gross barter TOT (the ratio of import and export quantities), and income TOT (net barter TOT multiplied by export quantity). Other concepts incorporate productivity indexes, real costs of production, and relative utility of imports versus domestic goods. Calculating different versions of terms of trade provides information about a country's trade balance and economic well-being over time.

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    Terms of trade (TOT) refer to the ratio of a country's export prices to its import prices. This indicates how much a country must pay for imports in terms of its exports. There are several concepts of terms of trade, including net barter TOT (the basic ratio of export to import prices), gross barter TOT (the ratio of import and export quantities), and income TOT (net barter TOT multiplied by export quantity). Other concepts incorporate productivity indexes, real costs of production, and relative utility of imports versus domestic goods. Calculating different versions of terms of trade provides information about a country's trade balance and economic well-being over time.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    111 views4 pages

    Unit - 3 Terms of Trade Types

    Uploaded by

    Aashik k Xavier
    Terms of trade (TOT) refer to the ratio of a country's export prices to its import prices. This indicates how much a country must pay for imports in terms of its exports. There are several concepts of terms of trade, including net barter TOT (the basic ratio of export to import prices), gross barter TOT (the ratio of import and export quantities), and income TOT (net barter TOT multiplied by export quantity). Other concepts incorporate productivity indexes, real costs of production, and relative utility of imports versus domestic goods. Calculating different versions of terms of trade provides information about a country's trade balance and economic well-being over time.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 4

    Terms of Trade: Different Concepts

    Meaning of terms of trade (TOT)

    In economics, terms of trade (TOT) refer to the relationship between how much money a
    country pays for its imports and how much it earns from exports. It is expressed as a ratio of
    import prices to export prices. The concept of terms of trade is important in economics as it
    throws light on the extent to which a nation can fund its imports based on the returns of its
    exports. The formula to calculate an economy's TOT is:

    Terms of Trade (TOT) can be illustrated with a numerical example as below:


    1. Let prices be constant at $1 per unit across both countries and for both products.
    2. Let Country-A can export 700 tons of rice to Country-B at $700 as export price.
    3. Let Country-A needs to import 200 tons of wheat from Country-B at $200 as import price
    We have;

    Hence, the value for Country A’s terms of trade is 350.

    Concepts of Terms of Trade


    The following are the various concepts of Terms of Trade:
    1. Net Barter Terms of Trade
    2. Gross Barter Terms of Trade
    3. Income Terms of Trade
    4. Single factor Terms of Trade
    5. Double Factorial Terms of Trade
    6. Real Cost Terms of Trade
    7. Utility Terms of Trade
    1. Net Barter Terms of Trade: Net Barter Terms of Trade also called commodity
    Terms of Trade is defined as a ratio of export prices to import prices.
    In symbolic terms: Tn = Px/Pm

    Where;
    Tn stands for net barter terms of trade.
    Px stands for price of exports (x),
    Pm stands for price of imports (m).

    2. Gross Barter Terms of Trade: Gross Barter Terms of Trade is the ratio of physical
    quantity of import to physical quantity of export.
    In symbolic terms: Tg = Qm/Q
    Where;
    Tg = gross barter terms of trade

    Qm = quantity of imports

    Qx = quantity of exports

    3. Income Terms of Trade: Income Terms of Trade is defined as- commodity TOT
    multiplied by quantity of export.
    Symbolically, income terms of trade can be written as: Ty = (Px/Pm) Qx.
    Where;

    Ty = Income terms of trade


    Px = Price of exports
    Qx = Volume of exports
    Pm= Price of imports

    4. Single factor Terms of Trade: Single factor Terms of Trade is calculated by


    multiplying Net Barter Terms of Trade with productivity index of domestic export sector.
    Symbolically, Single factor Terms of Trade can be written as: Ts = (Px/Pm) Zx
    Where;
    Ts = Income terms of trade
    Px = Price of exports
    Pm= Price of imports
    Zx = productivity index of domestic export sector
    5. Double Factorial Terms of Trade: Double Factorial Terms of Trade is calculated by
    multiplying Net Barter Terms of Trade with the ratio of factor productivity of domestic industry
    and foreign export industry.
    Symbolically, Double Factorial Terms of Trade can be written as: TD = TC (ZX/ZM)
    Where;
    TD = Double Factorial Terms of Trade

    TC= Net Barter Terms of Trade

    ZX = Productivity index in the domestic export sector,

    ZM= Import productivity index.

    6. Real Cost Terms of Trade: Real Cost Terms of Trade is measured by multiplying the
    single factor Term Of Trade by the index of the amount of disutility (pain , sacrifice,).
    Symbolically, Real Cost Terms of Trade can be written as: Tr = Ts.Rx

    Where;
    Tr = Real Cost Terms of Trade
    Ts = Single factor Terms of Trade
    Rx= disutility, real cost in producing export goods.

    7. Utility Terms of Trade: The utility terms of trade is calculated by multiplying the real
    cost terms of trade index with an index of the relative average utility of imports and of domestic
    commodities foregone.
    Symbolically, Utility Terms of Trade can be written as: Tu = Tr. U
    Where;
    Tu = Utility Terms of Trade

    Tr = Real cost terms of trade index

    U = Index of relative utility of imports and domestically foregone


    commodities.

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