NOTES

The Rate at which one country’s goods are exchanged for another is referred as terms of tade. the terms of trade may be favourable or may be unfavourable, the types of terms of trade are as explained as below:

a.    Net barter terms of trade

b.    Gross barter terms of trade

c.    Income terms of tade

a.    Viner’s Concept:

d.    Single Factoral Terms of trade

e.    Double Factoral Terms of trade

f.     Utility Terms of trade

1.    Net Barter Terms of Trade (NBTT)

The ratio of the prices of exports to the prices of imports is referred to as net barter terms of trade. It is also referred as “ the commodity terms of trade.”

It measures the relative changes in export prices and import prices. In symbolic terms:

Where,

                  NBIT= Net barter terms of trade

                  Px= Price of exports

                  Pm=Price of imports,9

If px>pm, terms of trade are favourable and vice versa.

However, if we want to compare changes in terms of trade between two periods, the following equation is applied:

Where, the figures 1 and 0 stand for current year and base year respectively.

Here, in the base year, each of the two index numbers (or prices of exports and imports) will always be 100, so that the terms of trade in the base year would be equal to one i.e.

Now, if in the current year, the export price index is 160 and thre import price index is 120, then the terms of trade will be:

This means, that in the current year, the terms of trade show an improvement of 33%. It follows that if export prices rise relative to import prices, the terms of trade rise in favour of the country. If import prices rise relative to export prices over a period of time, the terms of trade will fall or becomes unfavourable tp the country.

Merits :

i.  The concept of net barter terms of trade has come to be widely accepted as a useful device for measuring short-term changes in trading positions.

ii.  It serves as an important index expressing the purchasing power of exports in paying for imports. it is obvious that when a country’s terms of trade improve, less of its real product exported will be able to purchase a given unit of real product of the rest of the world and vice versa.

Demerits :

The main drawback is that :

    i.  It reveals nothing about the behaviour of the balance of payments, as it ignores the quantum (Volume) of trade.

  ii.  It neglect changes in composition of trade.

 iii.  It neglect changes in quality of exports and import.

 iv.  It neglect unilateral transactions as it considers only merchandise transactions.

  v.  It neglect the changes in the productivity of the export sector.

 vi.  It ignores the cost of production. 

1.    Gross Barter Terms of Trade (GBTT)

To make up for the deficiency realised in the net barter terms of trade, Professor Taussig devised the concept of Gross Barter Terms of Trade. He pointed out that instead of relating import and export prices, we should relate quantities of imports and exports.Thus, the gross barter terms of trade is an index of the relationship of the total physical quality of imports to the total physical quantity of exports.

The ration of physical quantity of imports to physical quantity of exports, is described as GBTT

GBTT = Gross Barter Terms of Trade

Qm= Physical quantity of imports

Qx = Physical Quantity of Exports

 3. Income Terms of Trade (ITT)

NBTT was further modified by Prof. Dorrance by introducing the concept of income terms of trade. income terms of trade can be defined as the value of exports divided by the price index for the exports. it can be represented by the equation as follows:

${\displaystyle ITT=\frac{P_x}{P_m}\times Q_x}$

Where ITT stands for the income terms of trade,

Px= Price of exports

Qx=Quantity of exports

 Income terms of trade is also measured by multiplying the net barter terms of trade with the volume/quantity of export.

4.  Single Factoral Terms of Trade (SFTT)

SFTT represents the ration of the export price index to the import price index. It adjusted for changes in the productivity of a country’s factors in the production of exports

 Symbolically it can be expressed as under:

4.            Double Factoral Terms of trade (DFTT)

The index of SFTT suffers from a short coming that it does not take into consideration the potential domestic cost of inports. Thus in order to overcome the defect of SFTT the concept of DFTT was introduced.

The double Factoral terms of trade take into account productivity in the country’s export as well as productivity of the foreign factors in the country’s imports

It can be symbolically presented as under

4.            Real cost Terms of Trade (RCTT)

RCTT is obtained by multiplying the single factoral terms of trade with the amount of disutility per unit of productive resources used in producing the export commodities