Terms of Trade How to measure the gains from
Description: Terms of Trade How to measure the gains from international trade? How to know whether trade has been favorable or unfavorable to us? How to know a nation is in surplus or deficit? All the questions would be answered once you study the
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slide1. Terms of Trade How to measure the gains from international trade?
How to know whether trade has been favorable or unfavorable to us?
How to know a nation is in surplus or deficit?
All the questions would be answered once you study the concept of trade and different methods of measuring it.
Terms of trade refers to the ratios of the price of an export commodity(s) to the price of an import commodity(s).
It is the rate at which a country’s exports are exchanged for its imports.<br>
slide2. The gain or loss from international trade depends on direction of terms of trade.
A gain from international trade would mean favorable terms of trade.
It would mean a higher level of exports as compared to imports.
If india exports goods worth Rs. 100 and imports goods worth Rs. 70, then terms of trade is considered to be Favorable for India.<br>
slide3. Methods to Measure Terms of Trade Net Barter Terms of Trade
It is expressed as the ratio of prices of exports to prices of imports.
The concept given by Jacob Viner.
It measures relative changes in export and import prices.
Symbolically it is expresses as:
NBTT= Px /Pm
NBTT= Net Barter Terms of Trade
Px= price index of export
Pm=price index of import<br>
slide4. If price index of export is more than price index of import, then terms of trade is favourable for that nation.
Unfavourable terms of trade
Balanced terms of trade
Net barter terms of trade is also known as commodity terms of trade.
For example, unit price index of export 480 and import is 600 then NBTT?<br>
slide5. NBTT was criticized by Prof. Taussig, saying it does not consider volume of export and imports.
Also quality of product traded.<br>
slide6. 2. Gross Terms of Trade
Introduced by Prof. Taussig to correct limitations of Net Barter terms of trade
Gross barter terms of trade measures the relationship between total physical quantity of imports and total physical quantities of exports.
GBTT= Qm / Qx
Where GBTT= Gross barter terms of trade
Qm = quantity index of import
Qx= quantity index of export<br>
slide7. If Qunatity index of import is greater than quantity index of export then gross barter terms of trade is considered to be favourable for a nation.
It means that given volume of export we can import greater volume of commodities.
But, if the above ratio is less than one, which means quantity index of import is less than quantity index of exports then gross barter terms of trade considered as unfavorable for the nation.
Ex. Quantity index of export was 300 and that of import was 350, Then GBTT?<br>
slide8. 3. Income terms of trade
As an improvement over Net barter terms of trade
Concept introduced by G.S. Dorrance
It referes to the ratio between index of value of exports (Px X Qx) and price index of imports. Symbolically,
ITT= Px.Qx / Pm
ITT = Income terms of trade
Px= price index of export
Qx= quantity index of export
Pm= price index of import<br>
slide9. If value of exports is greater than price index of imports, then income terms of trade would be favorable for a nation. But if value of export is less then price index of imports, it would indicate an unfavorable terms of trade.
A nation favorable trade suggest that nation’s income capacity to import has increase.
This is because export earnings has increased.
Ex. When unit price index of export is 500, quantity index is 300 units and unit price index of imports as 400 then ITT?<br>
How to know whether trade has been favorable or unfavorable to us?
How to know a nation is in surplus or deficit?
All the questions would be answered once you study the concept of trade and different methods of measuring it.
Terms of trade refers to the ratios of the price of an export commodity(s) to the price of an import commodity(s).
It is the rate at which a country’s exports are exchanged for its imports.<br>
slide2. The gain or loss from international trade depends on direction of terms of trade.
A gain from international trade would mean favorable terms of trade.
It would mean a higher level of exports as compared to imports.
If india exports goods worth Rs. 100 and imports goods worth Rs. 70, then terms of trade is considered to be Favorable for India.<br>
slide3. Methods to Measure Terms of Trade Net Barter Terms of Trade
It is expressed as the ratio of prices of exports to prices of imports.
The concept given by Jacob Viner.
It measures relative changes in export and import prices.
Symbolically it is expresses as:
NBTT= Px /Pm
NBTT= Net Barter Terms of Trade
Px= price index of export
Pm=price index of import<br>
slide4. If price index of export is more than price index of import, then terms of trade is favourable for that nation.
Unfavourable terms of trade
Balanced terms of trade
Net barter terms of trade is also known as commodity terms of trade.
For example, unit price index of export 480 and import is 600 then NBTT?<br>
slide5. NBTT was criticized by Prof. Taussig, saying it does not consider volume of export and imports.
Also quality of product traded.<br>
slide6. 2. Gross Terms of Trade
Introduced by Prof. Taussig to correct limitations of Net Barter terms of trade
Gross barter terms of trade measures the relationship between total physical quantity of imports and total physical quantities of exports.
GBTT= Qm / Qx
Where GBTT= Gross barter terms of trade
Qm = quantity index of import
Qx= quantity index of export<br>
slide7. If Qunatity index of import is greater than quantity index of export then gross barter terms of trade is considered to be favourable for a nation.
It means that given volume of export we can import greater volume of commodities.
But, if the above ratio is less than one, which means quantity index of import is less than quantity index of exports then gross barter terms of trade considered as unfavorable for the nation.
Ex. Quantity index of export was 300 and that of import was 350, Then GBTT?<br>
slide8. 3. Income terms of trade
As an improvement over Net barter terms of trade
Concept introduced by G.S. Dorrance
It referes to the ratio between index of value of exports (Px X Qx) and price index of imports. Symbolically,
ITT= Px.Qx / Pm
ITT = Income terms of trade
Px= price index of export
Qx= quantity index of export
Pm= price index of import<br>
slide9. If value of exports is greater than price index of imports, then income terms of trade would be favorable for a nation. But if value of export is less then price index of imports, it would indicate an unfavorable terms of trade.
A nation favorable trade suggest that nation’s income capacity to import has increase.
This is because export earnings has increased.
Ex. When unit price index of export is 500, quantity index is 300 units and unit price index of imports as 400 then ITT?<br>