Terms of TRade Presentation1

7/29/2019 Terms of TRade Presentation1

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BITS Pilani, K K Birla Goa Campus

Terms of Trade


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Terms of Trade

G = Mq / Xq * 100

N = Xp / Mp * 100

I = NXq

S = N XzD = N Xz / Mz

R = N Xz/r

U= N Xz/Xr *1/Um

G = Mq / Xq * 100

N = Xp / Mp * 100

I = NXq

S = N XzD = N Xz / Mz

R = N Xz/r

U= N Xz/Xr *1/Um

G = Gross Barter TOT

N = Net Barter TOT

I = Income TOT

S = Single Factorial TOTD = Double Factorial TOT

R = Real Cost TOT

U = Utility TOT

Xp= Price Index of Export

Mp= Price Index of Import.

Mq= Import Quantity Index

Xq= Export Quantity Index


Mp= Price Index of Import.

Mq= Import Quantity Index

Xq= Export Quantity Index

Xr = Index of real cost of producing

exports.

Xz = Export Productivity Ratio

Mz = Import Productivity Ratio

Taussing -1927 &

Heberler 1937

used this method

Most commonlyused expression to

assess Trade Gains

in contemporary

world.

Taussing -1927 &

Heberler 1937

used this method

Most commonlyused expression to

assess Trade Gains

in contemporary

world.


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Taussig introduced the distinction between cross & Net Barter

TT in 1927.

G= Gross Barter Terms

Mq= Import Quantity IndexXq= Export Quantity Index

Gross Barter Terms of Trade


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G=Mq/Xq*100

Multiplication of 100 is only to do onway decimal

expression of calculation. Let us examine in concrete

terms.

Take a base yaear as bench mark. Mq & Xq index in the

base year is always 100.

1990 - base year- G= 100/100*100=100

1991 - base year- G= 120/100*100=120 (improvement)

1992 - base year- G= 120/120*100=100 (no change)

1993 - base year- G= 100/1206*1005=83.333(Deterioration)

Symbolically- Gross Barter deals with

quantity index of export & Import


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1991- More import & same export. Purchasing power of

export has increased by 20 prints. Hence improvement.

Increase in import Q. Index improves grass Barter Terms &

Increase in Export Q. Index- worrens

Net Barter Or Commodity Terms of Trade-

Heberler Used this method.

This is the most commonly used expression of Trade Terms

in con temporary world.

Net Barter uses Price index for import & Export-


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N= Xp/Mp*100

N= Net Barter i.e. Xp/Mp


Mp= Price Index of Import.1990- Base year N= 100/100*100=100

1991- N= 120/100*100=120 (improvement)

1992- N= 100/120*100=83.33 (Deterioration)

1993- N= 120/120*100=100 (No change)

Symbalically-


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In 1991- 20% improvement in commodity terms. Because,

we buy our imports at the same price/ but sell our

exports at higher price.


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1- Generally believed that improvement in commodity

terms lead to economic welfare of the nation.

2- it happens because when export prices go up, we sell

our products at higher price leading to better profit.

3- that means maximization of commodity terms would

mean maximization of economic welfare.

However-

It does not happen that way. Commodity maximization may

lead to lets of export.

If it is not a monopoly market.

Commodity Term & NationalEconomy


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Hence optimization of commodity terms it better option

than maximization of commodity terms. It is proposed by

Haberler who suggested optimization over maximization.

* it is not important how high are your export pricing is.

Rather export earnings are important.

* it is because high export price may declin the valume of

export. Hence higher export earning is an indicator of

economic welfare.


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G. S. Dorrance in 1948-49- first time formulated income terms oftrade.

As the name indicates, it derives the terms of trade through theincome int. Trade generates through export. Changes in

export volume leads to changes in export prices.Vol. of export increase leads to export price changes.

I=NXq or I=Xp/Mp*Xq or I= Xpxp/Mp

I= Net Barter/ commodity TT Index = Xp/Mp (in net Barter it isdone)

Xp= Export Price Index

Mp= Import Price Index

Xq= Export quality index

Income Terms of Trade


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Base year 1990- I= 100*100/100=100

1991- I= 90*120/100=108 (Improvement)

1992- I= 110*80/100=88 (Deterioration)

Explanation-1- A rise in income terms means that the country can buy larger

volume of import from its export earning.

Expo pricing vs. expo. earning diagram can be used.


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Jacob Viner developed the single & Double Factorial Terms of

Trade in 1937.

1- Income Terms correct commodity Terms for changes in export

volume.

2- Factorial Terms correct income Terms for changes in the

productivity in producing Export Goods.

Ration of the Export Price index & Import Price Index adjusted

for changes in the productivity of the factors used in export

production refers single FTT.

Single & Double factorialTerms Trade-


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S=NXz S=Xp/Mp*Xz or S=XpXz/Mp

1990- base year

S=Single FTT

N=Net Barter/Commodity Terms i.e. Xp/Mp*100

Xp- Export Price Index

Mp- Imoprt Price Index

Xz- Export Productivity Ratio

1990 - S=Xp/Mp*Xz or S=XpXz/Mp

1990 - S=100*100/100=100 (base year)

1991 - S=90*100/100=90 (Deterioration)

1992 - S=90*120/100=108 (Improvement)

1993 - S=80*125/100=100 (No change)


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1- In 1993 it is a no change case. Interestingly however here Xp

has declined by 20%.

2- However, the decline has been absorbed by 25% in Export

productivity Ratio i.e. Xz.

3- This indicate that the country has brought dawn the cost of

export production by 25%.

4- It could be due to technology up gradation/ any such..

5- very important- if the exp. Country is rich & Import. Country is

poor, then this model using Economic welfare poor countrybuys imports at lessor price & rich country achieves

production efficiency.

It delivers Economic welfare as a whole & can reduce globle

inequalities.

Findings-


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D= N Xz/Mz or D= Xp/Mp* Xz/Mz

1990 D = 100/100*100/100*100=100

1991 D = 120/100*100/100*100=120 (improvement)

Xz = Export Productivity Ratio

Mz = Import Productivity Ratio

1992 D = 100/120*100/100*100=83.333 (Deterioration)

1993 D = 100/100*120/100*100=120

1994 D = 100/100*100/120*100=83.333

Finding when expo Price or productivity increase there is

improvement.

Double Factorial Terms ofTrade- D


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Double TT- when commodity Terms (N) are corrected for changes inproductivity in producing both exports & imports, the result isdouble factorial Terms of Trade.

DFTT & Real Cost TT is less utilized in the int. Market because-

1- export & import productivity index is difficult to measure. Hence it iselusive.

2- Measurement limitation reduces the practical utility of the factorialTerms of trade.

Real cost Terms of Trade- R

R=N Xz/r or R= Xp/Mp* Xz/Xr

R= Real cost

N= Xp/Mp Commodity Terms

Xz= Export Productivity Index

Xr= Index of real cost of producing exports.

Double FTT / Real cost TT &Utility TT have limited application.


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It tries to correct commodity terms (N) for changes in Export

productivity Index (Xz) & the Real Cost of producing Export

Goods.

1990 R = N Xz/r = 100/00* 100/100 *100=100

1991 R = 120/100* 100/100 *100=120 (Improvement)

1992 R = 100/120* 100/100 *100=83.33 (Dete)

1993 R = 100/100* 100/120 *100=83.33

Finding- when Xp and Xz increases there is impovement

N = Xp/Mp* Xz/r

1994 X- 100/100*100/80*100=100


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