Meaning And Definition Of Terms Of Trade (TOT)

Economics

Topic: Terms Of Trade (TOT)

Table Of Content

  • Meaning Of Terms Of Trade
  • Factors Affecting Terms Of Trade
  • Reasons For The Worsening Of Terms Of Trade (TOT) In Developing Countries
  • The Shortcoming Of Comparative Cost

What Is Terms Of Trade?

The terms of trade can be defined as the rate at which a country’s export is exchanged for it’s import. The rate of exchange will depend in the relative demand of each of the country concerned. The terms of trade depends on the prices of a country’s import and export. The terms of trade is favourable if the price of the export raise higher than those of the import and vice versa.

Factors Affecting Terms Of Trade

1. Fluctuation in the value of local currency, TOT improves but when it depreciate, TOT worsens.

2. Price Of Import And Export: When price of exports are high compared to price of imports, Terms Of Trade improves & vice versa.

3. Inflation: This will lead into decrease in domestic prices making export very expensive and less comparative while import will be cheaper and on the increase this will lead to unfavourable terms of trade.

Reasons For The Worsening Of Terms Of Trade In Developing Countries

1. Decrease in export earnings.

2. High importation of capital goods.

3. Low quality product.

4. Decrease in demand of primary production.

The Shortcoming Of Comparative Cost

1. In reality there are more than two countries in the world. The more countries that are participating in international trade, the more complex and unfavourable the law will be.

2. Also there are more than two commodities in the world. Many commodities make the principle impracticeable.

3. Factors of production are immobile between commodities.

4. There are other factors of production not only labour, other factors like land, capital, entrepreneur, So it is impossible for all the countries to have equal availability of labour with some level of skill and efficience.

5. Technology of production is never statical but in a state of flux through researches and development have new resources and always being discovered and aid one’s depleting.

6. Some countries are more advantaged than others as terms of trade and charges in them are in this factor. There are transport cost and insurance payments charged as goods moved between countries. Also people are not accord to migrate freely from one country to another.