(Index price of exports/ index price of imports) x 100
Favourable/ Improved Terms of Trade
Terms of trade above 100 are improving as the economy gets more imports per unit of exports this occurs when export prices increase or import prices decreases
Unfavourable/ Worsening Terms of Trade
Below 100 terms of trade are worsening as more exports are required to buy the same number of imports. Rising import prices or falling export prices cause this.
Impacts of Changes in a Country's Terms of Trade
-Reduced cost-push inflation
-Improved living standards
-Limited productivity if machinery and tech are expensive
-Difficulty paying foreign debt decreases living standards
-An improvement in ToT for price elastic goods worsens the current account
