4.1.4

• What are terms of trade?

  The terms of trade (ToT) measures the relative prices of a country's exports compared to the prices of imported goods and services

  Terms of trade is the ratio of the weighted price index for imports

  Terms of trade (ToT) index = (price index for exports) / (price index for imports) x100
• Factors influencing the terms of trade

  Global (world) prices for raw materials and components

  The exchange rate

  A weaker currency increases import prices leading to reduced terms of trade

  Import tariffs and other trade barriers such as quotas

  Domestic and global inflation rates

  Changing factor endowments
• Formula for calculating the terms of trade

  Terms of Trade (ToT) index = (price index for imports) / (price index for imports) x 100