Terms of Trade (ToT)


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The rate at which goods are traded, either between individuals or between nations. It is the quantity of one good exchanged per unit of another good. The terms of trade is essentially the price. But the price is stated in terms of the quantity of another good. Like any market price, the terms of trade is based on what the buyers are willing to pay and what the sellers are willing to accept. The terms of trade between any two countries is based on the relative opportunity cost in each country. A country’s terms of trade measures a country’s export prices in relation to its import prices.
If a country's terms of trade improve, it means that for every unit of exports sold it can buy more units of imported goods. So potentially, a rise in the terms of trade creates a benefit in terms of how many goods need to be exported to buy a given amount of imports. It can also have a beneficial effect on domestic cost-push inflation as an improvement indicates falling import prices relative to export prices. However, countries may suffer in terms of falling export volumes and a worsening balance of payments.
A worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports. According to the Prebish-Singer hypothesis this fate has befallen many developing countries given the general decline in commodity prices in relation to the price of manufactured goods. The hypothesis states that, over time, the terms of trade for commodities and primary products deteriorates relative to manufactured goods.  However, globalization has tended to reduce the price of manufactured goods over the past 15 years, so the advantage that industrialised countries had over developing countries may be falling. The impact of globalisation has tended to halt the decline in the terms of trade of developing economies.
India TOT
In India, Terms of Trade (ToT) correspond to the ratio of Price of exportable goods to the Price of importable goods. Terms of Trade in India remained unchanged at 60.20 Index Points in 2014 from 60.20 Index Points in 2014. Terms of Trade in India averaged 80.08 Index Points from 2000 until 2014, reaching an all time high of 100 Index Points in 2000 and a record low of 60.20 Index Points in 2014. Terms of Trade in India is reported by the Reserve Bank of India. 


Saturday, 25th Jul 2015, 10:23:16 AM

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