Terms of trade

[chasej]

I understand pretty much everything in economics aside from terms of trade. I just seems quite complicated.

Can someone please explain to me exactly what is meant by the "terms of trade" in simple terms? Because this is just boggling my mind.

[siddhartharora]

http://www.investopedia.com/terms/t/terms-of-trade.asp

Check this out. Brief definition. Not sure if its helpful or not, but let me know if it is not! :)

[Sebby]

Hmmm from my understanding, terms of trade (ToT) is simply the ratio of a country's export prices to it's import prices. So therefore, a ratio above 1 would suggest that the country in analysis receives more for its exports than it has to spend on its imports. This results in a positive net export balance (X-M) in terms of price.

Increased ToT is favourable to a country's economy as it increases the (X-M) components of the AD equation which in turn increases AD and economic growth. Also don't be confused with the law of demand in relation to ToT, as ToT deals mainly with commodities, suggesting that an increase in price will not discourage people from purchasing that product as it is regarded as a neccessity. An increased ToT is always favourable for a country whist a decreased ToT is unfavourable.

Hope this helps

[chasej]

Hmmm from my understanding, terms of trade (ToT) is simply the ratio of a country's export prices to it's import prices. So therefore, a ratio above 1 would suggest that the country in analysis receives more for its exports than it has to spend on its imports. This results in a positive net export balance (X-M) in terms of price.

Increased ToT is favourable to a country's economy as it increases the (X-M) components of the AD equation which in turn increases AD and economic growth. Also don't be confused with the law of demand in relation to ToT, as ToT deals mainly with commodities, suggesting that an increase in price will not discourage people from purchasing that product as it is regarded as a neccessity. An increased ToT is always favourable for a country whist a decreased ToT is unfavourable.

Hope this helps

Thanks the way my teacher explained it was just that it was exports divided by imports with no real depth so this defeneitly helped.