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1. SHRI RAMSWAROOP MEMORIAL UNIVERSITY
SESSION : 2019 – 20
TOPIC : TERMS OF TRADES
MADEBY :-
VINODKUMARYADAV
201810701110008
B.COM( H )

2. TERMS OF TRADE
TOT is defined as the ratio of average export prices and average
import prices..
For example, when USA and Canada are at trade, if one unit of rice
is exchanged for 2 units of sugar then terms of trade are 1 unit of
rice to 2 units of sugar i.e. 1:2 .
𝑰𝑵𝑫𝑬𝑿 𝑶𝑭 𝑻𝑬𝑹𝑴 𝑶𝑭 𝑻𝑹𝑨𝑫𝑬 =
𝑰𝑵𝑫𝑬𝑿 𝑶𝑭 𝑬𝑿𝑷𝑶𝑹𝑻 𝑷𝑹𝑰𝑪𝑬𝑺
𝑰𝑵𝑫𝑬𝑿 𝑶𝑭 𝑰𝑴𝑷𝑶𝑹𝑻 𝑷𝑹𝑰𝑪𝑬𝑺
×100
 Note: an index is used as it is a weighted average of thousands of
different import and export prices

3.  KEY POINTS:
 Terms of trade improve when its value increases (export prices rise relative to import
prices)
 The terms of trade deteriorate when the opposite is true.

4. Types of terms of trade
G.M.Meier classified the various types of Terms Of Trade ..
1. Classification based on exchange between commodity.
A- Net barter TOT.
B- Gross barter TOT.
C- Income TOT.
2. Classification based on change in factor productivity .
A- single factor TOT.
B- Double factor TOT.
3. Classification based on utility analysis .
A- Real cost ToT.
B-Utility TOT.

5. A- NET BARTER TOT
It is given by F.W.Taussing.
It is also called commodity ToT. By J.Viner.
It is defined as a ratio of export prices to import prices .
 FORMULA :- Tc =
PX
PM
×100
Commodity TOT generally increase welfare of country if Price of export
increases and price of import decreases..

6. B- GROSS BARTER TOT
It is also given by E.W.Taussing.
It is the ratio of physical quantity of import to physical quantity
of export.
 FORMULA :- TG =
QM
QX
× 100
Higher the ratio between quantities of imports and exports the better
the gross barter TOT.

7. C- INCOME TOT
 It is given by G.S.Dorrance. And H.stachle.
 It is defined as- commodity TOT multiplied by quantity of export.
 FORMULA :- Ti = TC × QX
Income TOT also known as export gain from trade..
Rise in income TOT means country import more goods than export
vice-versa.
If income TOT improve than commodity TOT will be deteriorate and
vice-versa.

8. FACTORS AFFECTING TERMS OF TRADE
1. TARIFF :- Tariff and import duties improve the TOT for
tariff imposing country.
2. Change intaste. :- When home country’s demand shift from
foreign goods to domestic goods then TOT become
favorable. and vice versa.
3. Change intechnology :- If home country used labour-saving
techniques in cloth industry then worsening the TOT. and
offer curve shift to right.

9. 4. Develuation :- Devaluation cause lowering export prices
compare to import prices so TOT become unfavorable
after devaluation.
Devaluation have both effects on TOT.(improve &
worsening)..
5.Demand and supply :- If demand for export and import is
more than supply then devaluation would lead to improve
in TOT.
(DX. DM>SX.SM)
If supply of export and import is more than demand then
devaluation would lead to worsening the TOT.
(DX. DM<SX.SM)

10. TERMS OF TRADE AND DEVELOPING COUNTRIES
1.There is a general feeling that the terms of trade
are normally unfavorable to developing countries.
2.In other words, these countries have to supply
more goods and services in real terms for a given
import of manufactured goods from the rest of the
world.

11. 3. These countries does not have advanced technology
as compared by developed countries, so their production
cost increases and that’s why they have to supply more
goods and services in real term.
4. On the other hand, developed countries have
much advance technology, so their cost of
production decreases.