Terms of Trade

The concept terms of trade (TOT ) and import exchange ratio or Real exchange ratio refers to an economic measure of the terms of trade between the exported and imported goods of a country. Here, a representative market basket is a basis. The term terms of trade, the real exchange rate is often referred to.

Conceptual framing

The term ( barter ) terms of trade, ( Natural ) exchange relationship in the 1927 in New York erschienenem of the American economist Frank William Taussig Plant International Trade was coined. The concept, however, was in 1844 in England by Robert Torrens in The Budget: On Commercial and Colonial Policy and the same year by John Stuart Mill in his (already 1829/30, written according to him ) essay " Of the Laws of Interchange between Nations; and the Distribution of Gains of Commerce among the Countries of the Commercial World " ( in Essays on Some Unsettled Questions of Political Economy ) developed and systematized.

Definition

The terms of trade ( T) - represented simplistically - by the ratio of export goods price level ( E) and imported goods price level ( I) detected.

The terms of trade to show how the terms of trade of imports and exports over a period of time evolved. Improve climbing, for example, export prices at constant or declining import prices, the terms of trade, because for the same export amount more imported goods may be imported. The terms of trade deteriorate or fall if the prices of imported goods faster than that of exports rise or when the domestic currency depreciates. For this exchange ratio, one can derive statements about the change of the benefits that pulls a country from the international trade.

The development of the terms - of-trade rate is used in the theory of evolution as an indicator of the economic prosperity of a country. The terms of trade deteriorate despite the economic growth we speak of impoverishment growth.

The definition, operationalization and evaluation of the data collected for the terms of trade are controversial in technical science. For example, the widespread especially in developing countries theory of secular deterioration in the terms of trade ( Raúl Prebisch ) being objected that they are not a trend, but change in wave movements and overall in different space and time scale.

Example

Let us suppose that Germany exports a machine worth 5,000 Euro to Poland and buys for 100 kg of potatoes for 200 zloty. The exchange rate is 1 EUR = 5 zloty.

(

So Germany gets 12,500 kg potatoes for a machine.

If a country for a unit of its export goods gets more units of the import good, then we speak of improving the terms of trade. In other words, the improvement in the terms of trade means nothing other than an increase in the available quantity of goods without the change in factor endowments or technology.

Factors influencing the terms of trade

Assuming that the data of the general equilibrium of a growing country such as factor endowments, needs structure remain unchanged, etc., can be the effect of trade policy, analyze particular customs policies on the terms of trade. The land rises inches, so that fewer goods are imported from abroad and domestic production increases. If the foreign export prices influenced the fall in import prices and the terms of trade improve. Such an effect is called the terms of trade argument for a tariff.

Assuming that trade policy is a growing country remains unchanged, the effects of the change in data can be analyzed. Economic growth of the country leads to an increase of the social product and the national income. It follows the increase in the overall demand for imported goods and export goods. The change in import demand that causes, immediately the terms of trade in general, depends on two components. Firstly, the change in the total demand for imported goods, which are called consumption effects. On the other hand, the change in the supply of imported goods, which is defined as the production effect. This results in the following comparison:

Economic growth (as change of date) → Consumption Effects and Production Effects → change in the demand for imports and the terms of trade

Terms- of-trade concepts

Goods exchange ratio ( commodity terms of trade )

This model assumes that there is only one export and import good one. The exchange of goods ratio indicates to what extent the amount of imported goods has increased or decreased.

An increase in the goods exchange ratio has a Wohlstandsverbessung result. The determination of this ratio is relatively simple, but long-term effects are not considered. This can have the consequence that, based on an increase in the export prices of goods improving long-term has a drop in sales abroad, and thus a decline in export volume.

Income replacement ratio ( income terms of trade )

The income replacement ratio extends the commodity exchange ratio to the quantity index of exports. It specifies whether the export price declines were offset by export volume increases.

The export goods price index is weighted by the export volume of goods index and divided by the import goods index. A comparison of this index over time is a confirmation as to whether the import volume has decreased as a counter variable for export to or whether the country receives so more or less units of an import good.

Simple exchange factor ratios (single fact orally terms of trade )

This concept takes into account the productivity changes in the domestic and foreign export sector. If productivity in the domestic export sector increases, then increases the amount of imported goods that can be purchased with a paid hour of work in the export sector

Double exchange factor ratios (double fact orally terms of trade )

The double exchange ratio factor also takes into account production progress in the import sector, for example simple factor terms of trade. In addition, the change in the relative competitive position of a country plays a role.

The effects of the transfer on the terms of trade

The international transfer is the transfer of purchasing power from one country to another.

Exceeds the demand for the import good of the interior the offer, the terms of trade deteriorate. If the demand for the import good of the interior is lower than the offer, to improve the terms of trade.

Example:

The domestic A makes a transfer payment to the foreign country Y B.

• Abroad (B ) increases the income to Y and imports grow by b · Y

Since export (A) = Import ( B).

The effect of exchange rate changes on the terms of trade

If the domestic currency devalued, export and import prices will rise in the domestic currency. In turn, reduced prices in the foreign currency. To the impact on the terms of trade can win here no clear result.

Consider a small country with unchanged production conditions. Perform exporters an estate in the foreign currency cheaper than the offer price, then the export price will go down. The import price in foreign currency will remain unchanged. The domestic demand for foreign goods is declining. The terms of trade deteriorate. This means that the export activity of a country must be increased and the import operation must be limits to obtain a current account balance.