Improvements in the terms of trade are not always good for a nation, and deteriorations in the terms of trade are not always bad for a nation
The terms of trade equation implies that improvements are always good and deteriorations are always bad, but this is a flawed assumption
Improvement in terms of trade due to increased demand for exports
1. Increase in export price
2. Quantity of exports remains the same
3. Increase in export revenue
Increase in export revenue due to improvement in terms of trade is a good thing for the nation
Improvement in terms of trade due to high relative inflation rates
1. Increase in export prices
2. Need to consider elasticity of demand for exports
Elastic demand for exports
As export prices increase, export revenue decreases
Inelastic demand for exports

As export prices increase, export revenue increases
The terms of trade equation assumes quantity of exports remains the same, which is a flawed assumption
Need to consider changes in export quantities and elasticity of demand to determine impact of terms of trade changes
Deterioration in terms of trade is not always bad - it could be due to increased productivity and competitiveness, leading to higher export quantities and revenues
For developing countries, deterioration in terms of trade can be bad due to the Prebisch-Singer hypothesis
The terms of trade metric ignores important factors like changes in export/import quantities and elasticities, which are crucial in determining the impact on the economy
Focusing only on terms of trade changes, without considering changes in revenues and expenditures, can lead to incorrect conclusions about the impact on the economy
