Unit VI - Terms of trade

Day and Date:

Unit Highlights…

Terms of trade

Factors affecting terms of trade

Text book reference chapters…

International Economics by Dominick Salvatore – Chapter 4 & 11

International Economics by Francis Cherunilam – Chapter 7

Terms of Trade…concept

Ratio of the price of its export commodity to the price of its import commodity.

Terms of Trade…types

Commodity/net barter terms of trade Gross barter terms of trade Income terms of trade Single factorial terms of trade Double factorial terms of trade

Terms of Trade…Commodity/net barter terms of trade

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

Terms of Trade… Gross barter terms of trade

The ratio (expressed as a percent) of a quantity index of exports to a quantity index of inputs.

Terms of Trade…Income terms of trade

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

Terms of Trade… Single factorial terms of trade

Net barter terms of trade adjusted for changes in the productivity of exports.

Terms of Trade… double factorial terms of trade

This adjusts for both the productivity of exports and the productivity of imports.

Factors affecting Terms of Trade

Dependency on foreign sourcing Relative competitiveness in production PESTLE aspects of business environment -

intra-country and the rest of the world

To conclude…

Economic efficiency is enhanced when nations engage in mutually beneficial exchange.

You should now be able to,

Explain the concept and types of terms of trade.

Identify factors that determine favorable terms of trade.