Terms of trade, Managerial Economics

Assignment Help:

TERMS OF TRADE

The relation between the prices of a country's exports and the prices of its imports, represented arithmetically by taking the export index as a percentage of the import index.  In the comparative cost model, terms of trade were, defined as the international exchange ratio between a country's export good and its import good.  This is the barter terms of trade which measures the quantity of exports which have to be sacrificed to obtain a unit of imports and is easily calculated when there are just two goods traded.  But in practice, countries trade hundreds of different goods and services and the concept of the terms of trade becomes more complex.  Estimates of the terms of trade are usually made by calculating an index of import prices; this gives an index of the term of trade:

Terms of trade index = Export Price Index    x  100

                                          Import Price Index

Thus, the price indices are essentially weighted averages of export and import pries.  If these are set at 100 in the same base year, say, 1990, then the terms of trade index is also 100.  If, for instance, import prices fall relative to  export prices, the terms of trade will rise above 100, the terms of trade then being said to be more favourable to the country concerned since it means that it can obtain more goods from abroad than before in exchange for a given quantity of exports.  On the other hand, if the terms of trade become unfavourable, the terms of trade index will fall below 100.

A rise in terms of trade index is usually described as an "improvement" or as "favourable" on the grounds that a rise in export prices relative to import prices theoretically means that a country can now buy the same quantity of imports for the sacrifice of less export (or it can have more imports for the same volume of exports).  Similarly, a fall in the terms of trade index is a "deterioration" or is an "unfavourable" movement.


Related Discussions:- Terms of trade

Neo classical vs keynesian school, Neo Classical vs Keynesian School W...

Neo Classical vs Keynesian School We know that Keynesian economics was propounded as a revolution against the then  prevailing orthodoxy  of  the classical school.  In  time,

Scarcity and oppotunity cost, how manager can apply scarcity and oppotunity...

how manager can apply scarcity and oppotunity cost in managerial decision making

Long run equilibrium of a firm under perfect competition, In the long run, ...

In the long run, because of the assumption of free entry and exit of the firms, it's not possible for the firms to make super-normal profits nor it is possible for them to incur lo

BREAK EVEN ANALYSIS, WRITE A NOTE ON BREAK -EVEN ANALYSIS IN PROFIT MANAGEM...

WRITE A NOTE ON BREAK -EVEN ANALYSIS IN PROFIT MANAGEMENT

Explain about the equilibrium in the labor market, Explain about the equili...

Explain about the equilibrium in the labor market. Equilibrium into the Labor Market: All of firm will hire labor up to the point at that the value of the marginal product o

Example on changes in fixed costs and profit maximisation, Q. Example on Ch...

Q. Example on Changes in fixed costs and profit maximisation? What if arena owner in the illustration above triples the fee for the subsequent concert but all other factors are

The effect of this immigration on wages, An Economy consists of two regions...

An Economy consists of two regions, the North & the South. The short-run elasticity of labor demand in every region is -0.5. Labor supply is perfectly inelastic within both regions

State the traditional demand theory, State the Traditional demand theory ...

State the Traditional demand theory So an over-simplified and the most commonly stated demand function is: Dx = f (PX) thatconnotes that demand for commodity X is the function

Stock market, find out the characterstics of national stock exchange

find out the characterstics of national stock exchange

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd