6.1.3—Terms of trade

The terms of trade (TOT) index compares an economy’s export price index with its import price index, commonly as export prices divided by import prices times 100.

An improvement means export prices have risen relative to import prices, so a given volume of exports can buy more imports. The welfare effect depends on export and import volumes, elasticities, concentration and who receives the income.

If export prices rise 12% and import prices rise 4%, the TOT improves approximately 7.7% using index ratios, not simply “8 percentage points” in every calculation.

A better TOT does not guarantee a better trade balance: quantities may change, and an export price rise can reduce export volume.