Presentation on terms of trade will provide basic understanding about the concept of Terms of trade. It is one of the Vital Concepts of International Business and important to understand the gain while trading internationally.

1. Presentation On
Terms of Trade
Presentation By: Tushar Dholakiya

2.  Every Country has its own Money
 Ratio of price & volume Exports and price &volume of Imports

3. What do you understand by this Phrase?
 “Terms of Trade is meant rates at which the products of the one country are exchanged for the
products of the other.”
 Formula (Terms of Trade) = (Px of Exports) * (Qx of Exports)
(Px of imports) * (Qx of Imports)
= Revenue received from export commodity
Payment paid for import commodity

4. Why does this matter ?
 The term of trade affect the gains from trading with other countries.
 It also impacts variable such as balance of payments
 It affects Standard of Living in the economy.
 Prices of Imported Products

5.  Favorable : When exports prices are relatively higher to Import prices. Because the product of one
unit of domestic resources will exchange against the product of more than one unit of foreign
exchange as its share of gain from trade would be relatively larger.
 Unfavorable : When imports prices are relatively higher to Export prices.
When Favorable or Unfavorable :

6.  For Instance, “If Country A’s Demand for India’s Wheat is much more intense than India’s Demand
for Country A’s cotton, the terms of Trade will be More Favorable to India than to Country A. This is
because Country A’s demand for India’s Wheat is Highly Inelastic while India’s demand for Country
A’s cotton is highly elastic.”

7. Types of Term of Trade
Classification based on exchange between commodity:
 Net Barter/Commodity Term of Trade
 Gross Barter Term of Trade
 Income Term of Trade

8. Net Barter/Commodity TOT
 The most widely used concept of the terms of trade is what has been caned the net barker terms
of trade which refers to the relation between prices of exports and prices of imports.
 It is given by F.W.Taussing & J. Vinner.
 TOTc = Px / Pm * 100
 TOTc stands for the commodity terms of trade.
 P for price, the variable x for exports and m for imports.

9. Interpretation of NET Barter TOT
 Commodity TOT generally increase welfare of a country if price of export increases and price of
import decreases.
 For e.g, we take the indices of export and import prices for the year 2005 as 100. We assume also
that the export prices index for the year 2015 is 330 and import prices index 380.
 It shows that the prices of imports have increased more than the exports prices. The terms of trade
are unfavorable to the country by 13%.
 In other words, the country has to pay 13% more for a given amount of imports.
 TOT in excess of 100 shows improvement while less than 100 shows deteriorating.
 TOT should be optimized not try to maximized.

10. Gross Barter Terms of Trade
The gross barter terms of trade is the ratio between the quantities of a country’s imports and
exports. Symbolically,
TOTg = Qm/Qx
Where,
TOTg = Gross barter terms of trade,
Qm = Quantity of imports
Qx = Quantity of exports

11.  Higher the ratio between quantity of import and exports the better gross barter Term of Trade.
 For e.g 2005 as base year and expressing Indias both quantity of export and import is 100.
 Suppose in year 2009 160 index for import qty. and 120 export qty. Calculate Gross barter Term of
Trade.

12. Income Term of Trade
 It is given G.S Dorrance and H. Staehle.
 This index takes into account the volume of exports of a country and its export and import prices
(the net barter terms of trade).
 TOTi= Px/Pm * Qx
 Income term of trade also known as export gain from trade.

13. Terms of trade of Developed V/s Developing
countries
34
128
24
163
0
20
40
60
80
100
120
140
160
180
1980 2006
Volume of Export
Developed Country Developing Country
Volume of Export
1980 2006 % Change
Developed Country 34 128 276.40%
Developing Country 24 163 579.10%

14. 34
132
25
165
0
20
40
60
80
100
120
140
160
180
1980 2006
Volume Of Imports
Developed Country Developing Country
Volume Of Imports
1980 2006 % change
Developed Country 34 132 288.20%
Developing Country 25 165 560%

15. India
1970-71 2006 -07 % Change
Unit value Of imports 35.3 608 1722.38
Unit value of exports 45 863 1917.778
35.3
608
45
863
0
200
400
600
800
1000
1970-71 2006 -07
India
Unit value Of imports Unit value of exports
• It implies value of imports grew
much more than Volume of
import , ultimately it increases
the financial burden of India.

16.  Thank You !!!!