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Terms of Trade

BITS Pilani, K K Birla Goa Campus

Terms of Trade
G = Gross Barter TOT N = Net Barter TOT I = Income TOT S = Single Factorial TOT D = Double Factorial TOT R = Real Cost TOT U = Utility TOT G = Mq / Xq * 100 N = Xp / Mp * 100 I = NXq S = N Xz D = N Xz / Mz R = N Xz/r U= N Xz/Xr *1/Um
Taussing -1927 & Heberler 1937 used this method Most commonly used expression to assess Trade Gains in contemporary world.

Xp= Price Index of Export Mp= Price Index of Import. Mq= Import Quantity Index Xq= Export Quantity Index

Xr = Index of real cost of producing exports. Xz = Export Productivity Ratio Mz = Import Productivity Ratio
BITS Pilani, K K Birla Goa Campus

Gross Barter Terms of Trade


Taussig introduced the distinction between cross & Net Barter TT in 1927. G= Gross Barter Terms Mq= Import Quantity Index Xq= Export Quantity Index

BITS Pilani, K K Birla Goa Campus

Symbolically- Gross Barter deals with quantity index of export & Import
G=Mq/Xq*100 Multiplication of 100 is only to do onway decimal expression of calculation. Let us examine in concrete terms. Take a base yaear as bench mark. Mq & Xq index in the base year is always 100. 1990 - base year- G= 100/100*100=100 1991 - base year- G= 120/100*100=120 (improvement) 1992 - base year- G= 120/120*100=100 (no change) 1993 - base year- G= 100/1206*1005=83.333(Deterioration)

BITS Pilani, K K Birla Goa Campus

1991- More import & same export. Purchasing power of export has increased by 20 prints. Hence improvement. Increase in import Q. Index improves grass Barter Terms & Increase in Export Q. Index- worrens Net Barter Or Commodity Terms of TradeHeberler Used this method. This is the most commonly used expression of Trade Terms in con temporary world. Net Barter uses Price index for import & Export-

BITS Pilani, K K Birla Goa Campus

SymbalicallyN= Xp/Mp*100 N= Net Barter i.e. Xp/Mp Xp= Price Index of Export Mp= Price Index of Import. 1990- Base year N= 100/100*100=100 1991- N= 120/100*100=120 (improvement) 1992- N= 100/120*100=83.33 (Deterioration) 1993- N= 120/120*100=100 (No change)

BITS Pilani, K K Birla Goa Campus

In 1991- 20% improvement in commodity terms. Because, we buy our imports at the same price/ but sell our exports at higher price.

BITS Pilani, K K Birla Goa Campus

Commodity Term & National Economy


1- Generally believed that improvement in commodity terms lead to economic welfare of the nation. 2- it happens because when export prices go up, we sell our products at higher price leading to better profit. 3- that means maximization of commodity terms would mean maximization of economic welfare. HoweverIt does not happen that way. Commodity maximization may lead to lets of export. If it is not a monopoly market.

BITS Pilani, K K Birla Goa Campus

Hence optimization of commodity terms it better option than maximization of commodity terms. It is proposed by Haberler who suggested optimization over maximization. * it is not important how high are your export pricing is. Rather export earnings are important. * it is because high export price may declin the valume of export. Hence higher export earning is an indicator of economic welfare.

BITS Pilani, K K Birla Goa Campus

Income Terms of Trade


G. S. Dorrance in 1948-49- first time formulated income terms of trade. As the name indicates, it derives the terms of trade through the income int. Trade generates through export. Changes in export volume leads to changes in export prices. Vol. of export increase leads to export price changes. I=NXq or I=Xp/Mp*Xq or I= Xpxp/Mp I= Net Barter/ commodity TT Index = Xp/Mp (in net Barter it is done) Xp= Export Price Index Mp= Import Price Index Xq= Export quality index
BITS Pilani, K K Birla Goa Campus

Base year 1990- I= 100*100/100=100 1991- I= 90*120/100=108 (Improvement) 1992- I= 110*80/100=88 (Deterioration) Explanation1- A rise in income terms means that the country can buy larger volume of import from its export earning. Expo pricing vs. expo. earning diagram can be used.

BITS Pilani, K K Birla Goa Campus

Single & Double factorial Terms TradeJacob Viner developed the single & Double Factorial Terms of Trade in 1937. 1- Income Terms correct commodity Terms for changes in export volume. 2- Factorial Terms correct income Terms for changes in the productivity in producing Export Goods. Ration of the Export Price index & Import Price Index adjusted for changes in the productivity of the factors used in export production refers single FTT.

BITS Pilani, K K Birla Goa Campus

S=NXz S=Xp/Mp*Xz or S=XpXz/Mp 1990- base year S=Single FTT N=Net Barter/Commodity Terms i.e. Xp/Mp*100 Xp- Export Price Index Mp- Imoprt Price Index Xz- Export Productivity Ratio 1990 - S=Xp/Mp*Xz or S=XpXz/Mp 1990 - S=100*100/100=100 (base year) 1991 - S=90*100/100=90 (Deterioration) 1992 - S=90*120/100=108 (Improvement) 1993 - S=80*125/100=100 (No change)

BITS Pilani, K K Birla Goa Campus

Findings1- In 1993 it is a no change case. Interestingly however here Xp has declined by 20%. 2- However, the decline has been absorbed by 25% in Export productivity Ratio i.e. Xz. 3- This indicate that the country has brought dawn the cost of export production by 25%. 4- It could be due to technology up gradation/ any such.. 5- very important- if the exp. Country is rich & Import. Country is poor, then this model using Economic welfare poor country buys imports at lessor price & rich country achieves production efficiency. It delivers Economic welfare as a whole & can reduce globle inequalities.
BITS Pilani, K K Birla Goa Campus

Double Factorial Terms of Trade- D


D= N Xz/Mz or D= Xp/Mp* Xz/Mz 1990 D = 100/100*100/100*100=100 1991 D = 120/100*100/100*100=120 (improvement) Xz = Export Productivity Ratio Mz = Import Productivity Ratio 1992 D = 100/120*100/100*100=83.333 (Deterioration) 1993 D = 100/100*120/100*100=120 1994 D = 100/100*100/120*100=83.333 Finding when expo Price or productivity increase there is improvement.

BITS Pilani, K K Birla Goa Campus

Double FTT / Real cost TT & Utility TT have limited application.


Double TT- when commodity Terms (N) are corrected for changes in productivity in producing both exports & imports, the result is double factorial Terms of Trade. DFTT & Real Cost TT is less utilized in the int. Market because1- export & import productivity index is difficult to measure. Hence it is elusive. 2- Measurement limitation reduces the practical utility of the factorial Terms of trade. Real cost Terms of Trade- R R=N Xz/r or R= Xp/Mp* Xz/Xr R= Real cost N= Xp/Mp Commodity Terms Xz= Export Productivity Index Xr= Index of real cost of producing exports.
BITS Pilani, K K Birla Goa Campus

It tries to correct commodity terms (N) for changes in Export productivity Index (Xz) & the Real Cost of producing Export Goods. 1990 R = N Xz/r = 100/00* 100/100 *100=100 1991 R = 120/100* 100/100 *100=120 (Improvement) 1992 R = 100/120* 100/100 *100=83.33 (Dete) 1993 R = 100/100* 100/120 *100=83.33 Finding- when Xp and Xz increases there is impovement N = Xp/Mp* Xz/r 1994 X- 100/100*100/80*100=100

BITS Pilani, K K Birla Goa Campus

BITS Pilani, K K Birla Goa Campus

BITS Pilani, K K Birla Goa Campus

BITS Pilani, K K Birla Goa Campus