Meaning:

The rate at which a given quantity of a country’s export goods are exchanged for a given quantity of import goods is called the terms of trade. In other words, the terms of trade means the rate at which one country’s goods are exchanged for another country’s good. In short, terms of trade mean the term on which two countries trade with each other. Example: suppose country A is exporting 1 unit of cotton to country B and in return gets from it 1 unit of wheat then the ratio of exchange is also called terms of trade is 1:1. Terms of trade can be favorable as well as unfavorable. Concepts of terms of trade are of many, they are.

Concepts of terms of trade:

1. Net barter terms of trade: The concept of net terms of trade is the contribution of J.S. mill and Alfred Marshal. it is the ratio of the index of export prices to the index of import prices. It is obtained by dividing the index of export prices by the index of import prices.

It may be noted that are index of export prices the index of import prices and the ratio between the two that is the quotient thus obtained are expressed in percentage. In symbols the net barter terms of trade is expressed as follows P_X/P_m*100

Here PX stand for index number of export prices and pm is for index number of import prices.

Examples: suppose index number of export prices of a country A is 200 and index number of import prices of commodity country A is 100 then the net barter terms of trade will be

200/100*100=200%

This mean start the net barter terms of trade of A in the current year has shown an increase of 100% over the base period if the value of the net barter terms of trade comes to less than 100 that means the terms of trade have fallen to that extent.

1. Gross barter terms of trade: the concept of gross barter terms of trade was introduced by professor Tausig.

Gross barter terms of trade refer to the rate of exchange between the whole of a country’s physical export and the whole of the country’s physical imports. It is obtained by diving the index of the physical quantity of exports by the index of the physical quantity of imports.

In symbols the gross barter terms of trade is expressed as

 Q_X/Q_M*100

Here Q_X stands for the index number of quantity of exports, Q_M stands for the index number of quantity of imports.

For example: if index number of quantity of exports that is Q_X is 100 and the index number of Imports that is Q_M is 80 then gross barter terms of trade will be equal to  100/80*100, this means that the GBT has shown improvement of 25%.

1. Income terms of trade: the concept of income terms of trade has been introduced by G.S Durance. The income terms of trade are also referred to as a country’s capacity to import. The income terms of trade is obtained by dividing the value of exports by the index of import prices.

In symbols the income terms of trade is

Q_X*P_Y/Pm*100

Q_X represents quantity index of exports. P_Y represents the price index of exports and Pm stands for the index imports price.

It may be noted that the rise in income terms of trade mean the country can obtain a large volume of imports from its exports in a given year, relative to the base year.

Factor determining the terms of trade:-

• Elasticity of demand
• Elasticity of supply
• Availability of substitutes
• Size of demand
• Rate of exchange
• Production structure or production pattern of the country.

also read: explain the Heckcher-Ohlin theory of international trade.