Answer to Question #292795 in Economics for Hafsa

Question #292795

What do the terms of trade measure? What is the relationship between the terms of trade in a world of two trading nations? How are the terms of trade measured in a world of more than two traded commodities?

1
Expert's answer
2022-02-06T14:21:48-0500

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.

Since in a two-nation world, the exports of a nation are the imports of its trade partner, the terms of trade of the latter are equal to the inverse, or reciprocal, of the terms of trade of the former.


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