Globalisation has meant that the price of invisibles, such as services, has been less impacted than visibles, such as manufactured goods. The price of manufactured goods has fallen more than services. This means that the terms of trade of countries, such as the UK which export more services and import more manufactured goods, has improved.
The Prebisch-Singer hypothesis suggests that over time, due to falling commodity prices in relation to manufactured goods, the terms of trade for developing countries has fallen. Due to globalisation reducing the price of manufactured goods, this effect has been offset slightly.
The price elasticity of demand impacts the terms of trade. The more inelastic the demand for exports than imports, the more favourable the terms of trade, since the country can demand higher prices for exports.
If a country only imports manufactured goods and only exports primary goods, then the terms of trade will be worse.
An appreciation in the country's exchange rate results in an improvement in the terms of trade, since this results in an increase in export prices and a decrease in the price of imports.
If a country employs a protectionist measure, then the terms of trade will improve because imports are restricted. This is providing other countries do not retaliate.
A country with a higher population demands more imports, so they are likely to have a relatively worse terms of trade compared to a country with a smaller population.
