Topic 5 - Terms of Trade -BoT -BoP -26.09.2017.pptx

Topic 5 - Terms of Trade -BoT -BoP -26.09.2017.pptx - Terms...

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RMA 209: INTRODUCTION TO INTERNATIONAL ECONOMICS Terms of trade and Balance of Payments
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1. Meaning of terms of trade Terms of trade refer to the physical exchange ratio at which goods are exchanged for one another between the countries. Index of export prices(P X ) x 1oo Terms of trade(T)= Index of import prices(P m ) (Here, T=Terms of trade; P X = Index of export prices; P m =Index of import prices). This is also called the index of trade. Terms of trade are used to measure the gain or loss from international trade.
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Terms of Trade Computation
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Favourable & Unfavourable ToT Terms of trade can be favourable or unfavourable to a nation. 1) Favourable Terms of trade : Terms of the trade become favourable for a country if this index increase. Assume export prices increase by 15% and import prices increase by 5%, the index of terms of trade increase from 100 to 109. Terms of trade (TOT) = 115/105 x 100= 109(approx.) 2 ) Unfavourable Terms of trade : Terms of trade becomes unfavourable when percentage change in export prices is less than the percentage change in import prices. Then the terms of trade index should be: Terms of trade (TOT)=105/110 x 100=95(approx.)
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2. Types of Terms of Trade Main types of terms of trade, according to Jacob Viner and Meier are as follows: 1) Net Barter or commodity Terms of trade 2) Gross Barter Terms of trade 3) Income Terms of trade 4) Single Factoral Terms of trade 5) Double Factoral terms of trade 6) Real costs terms of trade 7) Utility terms of trade
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(1) Net Barter or Commodity Terms of Trade Commodity terms of trade are expressed in a formula as under: T C =P X /P m (here, T C = commodity terms of trade; P X = Index of export prices; P m = Index of import prices.) Commodity terms of trade in different time period can be measured by the following formula: P x1 /P m1 : P xo /P mo (here, P x1 = index of export prices in the current year, P m1 =Index of import price in the current year; P xo =Index of export price in the base; P mo =Index of import prices in the base year.)
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Net Barter or Commodity Terms of Trade Criticism : The principle of commodity terms of trade has been criticised on the following grounds: i. The principle of commodity terms of trade is based on export and import prices indices. It does not take into consideration the changes in composition of the foreign trade and quality of the goods. ii. The concept examines short-terms changes only. It throws no light on long- term changes.
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(2) Gross Barter terms of trade Gross commodity terms of trade are expressed in a formula as under: T Q = Q m /Q x (Here, T Q = Gross barter terms of trade; Q m =Quantity of imports; Q X = Quantity of exports.) Gross barter or commodity terms of trade in different time periods can be measured as follows: Q m1 /Q X1 : Q mo /Q xo (here, Q m1 = Index of quantity imported in the current year; Q x1 =Index of quantity exported in the current year; Q mo =Index of quantity imported in the base year; Q xo = Index of quantity exported in the base year.)
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Gross Barter terms of trade Criticism: Gross commodity terms of trade are criticised as under:
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