AP Micro & MacroCore Economic Concepts
Terms of Trade
Terms of trade refers to the relative price of imports in terms of exports and is defined as the ratio of export prices to import prices.
The terms of trade indicates how much a country can buy of the goods it doesn't produce domestically using one unit of goods it does produce. An improvement in a nation's terms of trade means it can buy more imports for a given level of exports, benefiting the country. Deteriorating terms of trade means a country must export more to finance the same level of imports.
Formula / Example
Terms of Trade = (Index of Export Prices) / (Index of Import Prices)
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