Terms of trade and the seven types of trade.pptx

This presentation describes the terms of trade and its types

1. Terms of trade

2. Trade Terms of trade are defined as the ratio between the index of export prices and the index of import prices. If the export prices increase more than the import prices, a country has a positive terms of trade, as for the same amount of exports, it can purchase more imports.

3. Net Barter It is calculated  as the percentage ratio of the export unit value indexes to the import unit value indexes, measured relative to the base year 2000. Also, referred to as commodity terms of trade, it was coined to better understand the overall view of the changes   in a country’s trading.

4. 2 – Gross Barter It is a ratio  of total physical quantities of imports to the total physical quantities of a given country’s exports. It is measured by T G  = (Q M /Q X ) × 100 where T G  is Gross Barter TOT, Q M  is Aggregate Quantity of Imports and Q X  is the Aggregate Quantity of Exports. A higher  T G  can indicate that the country can import more units from abroad for the given units of exports. In our example from earlier, we easily see that Country A has a higher T G,  relative to Country B as it can import more units.

5. 3 – Income TOT It is the purchasing power, in  terms of  (described as) the price of imports, calculated as Pm, of the value (price times quantity) of a country’s exports: ITT = PxQx/Pm. ITT can increase through an increase in export prices, a rise in the number of exports, and a decrease in imports’ prices. Overall, it is used as one of the measurements of the capacity to import

6. 4 – Single Factorial TOT It is found by multiplying the net barter with the productivity index in the domestic export sector. This is essentially the net barter terms of trade corrected for changes in the productivity of export goods.

7. 5 – Double Factorial TOT This expresses the change in the productivity of both the domestic export industry and the export industries of the foreign countries selected. It is found by T D  = T C  (Z X /Z M ) where T D  is the Double Factorial TOT, T C  is the Commodity TOT, Z X  is the productivity index in the domestic export sector, Z M  is the productivity index in the foreign countries’ export sector, or it is an import productivity index.

8. 6 – Real Cost TOT It is the theory  that states that an increase in export production drives resources away from other sectors of the economy to the export sector. For example, if farm workers are being used to produce wheat to export to other countries, resources like the labor, extraction, processing, shipping personnel etc. are being pulled from the production to suffice wheat production. Those workers could also theoretically be used for community farming or processing other grains needed for domestic consumption. The amount of resources allocated elsewhere or “utility” cost (also described as “sacrifices”) per unit of resources employed in the production of export goods is considered to be the real cost terms of trade. Therefore, it accounts for the  opportunity cost  of exporting a good into the overall picture of exports production. It is calculated by Tr = T s . R x

9. 7 – Utility TOT This measures  the changes   in the disutility of producing a unit of exports. It also measures the changes in the satisfactions arising imports and the indigenous products wasted to produce those exports. It is essentially the changes in the real cost tot in terms of the utilities wasted. It is found by multiplying the real cost terms of trade with an index of the relative average utility of imports and domestic commodities wasted.