Measurement of Terms of Trade - SS3 Economics Lesson Note

The measurement of terms of trade is typically done by comparing the index of a country's export prices to the index of its import prices over a specific period of time. The index of export prices measures the average price of the goods that a country exports, while the index of import prices measures the average price of the goods that a country imports.

To calculate the terms of the trade index, we take the index of export prices and divide it by the index of import prices, then multiply the result by 100. This gives us a percentage that represents the country's terms of trade for the period in question.

For example, if a country's export price index for a given year is 120 and its import price index is 60, the terms of trade index for that year would be 120/60 x 100 = 200. This indicates that the country's terms of trade were favourable, meaning it was able to purchase more imports for the same value as exports.

Why is the measurement of terms of trade important?

The measurement of terms of trade is an important tool for analyzing a country's economic performance and identifying trends over time. By monitoring changes in a country's terms of trade, policymakers and economists can assess the impact of external factors, such as changes in global commodity prices, on the country's economy and adjust their policies accordingly.