Terms of trade (TOT) refers to the relative price of exports in terms of importsand is defined as the ratio of export prices to import prices.It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.
An
improvement of a nation's terms of trade benefits that country in the
sense that it can buy more imports for any given level of exports. The
terms of trade may be influenced by the exchange rate because a rise in
the value of a country's currency lowers the domestic prices of its
imports but may not directly affect the prices of the commodities it
exports.
The term (barter) terms of trade was first coined by the US American economist Frank William Taussig in his 1927 book International Trade. However, an earlier version of the concept can be traced back to the English economist Robert Torrens and his book The Budget: On Commercial and Colonial Policy, published in 1844, as well as to John Stuart Mill's essay Of
the Laws of Interchange between Nations; and the Distribution of Gains
of Commerce among the Countries of the Commercial World, published in the same year, though allegedly already written in 1829/30.
Terms
of trade (TOT) is a measure of how much imports an economy can get for a
unit of export goods. For example, if an economy is only exporting
apples and only importing oranges, then the terms of trade are simply
the price of apples over the price of oranges. In other words, how many
oranges can you get for a unit of apples. Since economies typically
export and import many goods, measuring the TOT requires defining price
indices for exported and imported goods and comparing the two.
