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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
Xp= Price Index of Export
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.
7/29/2019 Terms of TRade Presentation1
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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
Xp= Price Index of Export
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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