Terms of Trade

In international economics and international trade, terms of trade or TOT is (Price Exports)/(Price Imports). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is not affected by the exchange rate because a rise in the value of a country's currency simultaneously lowers domestic prices for both imports and exports.
Contents
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    * 1 The term
    * 2 Two country model CIE economics
    * 3 Multi-commodity multi-country model
    * 4 Limitations
    * 5 See also
    * 6 References

[edit] The term

"Terms of trade" takes a plural form. However, it is a single number that represents the ratio of the relative prices.
[edit] Two country model CIE economics

In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the total export revenue[clarification needed] a country receives for its export commodity to the total import revenue it pays for its import commodity. In this case the imports of one country are the exports of the other country. For example, if a country exports 50 dollars worth of product in exchange for 100 dollars worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30%...