Terms of Trade - SS3 Economics Lesson Note

Terms of trade refers to the ratio between the price of a country's exports and the price of its imports. More specifically, it is the value of a country's exports relative to its imports. Maintaining favorable terms of trade is important for a country's economic growth and development

For example, if a country exports $1600 worth of goods and imports 800 worth of goods, its terms of trade would be 2:1, meaning it can purchase twice as much imports for the same value of exports.

When a country's terms of trade are favorable, it means that the prices of its exports are higher than the prices of its imports, which leads to an increase in the country's income and standard of living. 

Similarly, when a country's terms of trade are unfavorable, it means that the prices of its exports are lower than the prices of its imports, which can lead to a decrease in the country's income and standard of living.