Terms of trade

An improvement of a nation's terms of trade benefits that country in the sense that it can buy more imports for any given level of exports.

However, an earlier version of the concept can be traced back to the English economist Robert Torrens and his book The Budget: On Commercial and Colonial Policy, published in 1844, as well as to John Stuart Mill's essay Of the Laws of Interchange between Nations; and the Distribution of Gains of Commerce among the Countries of the Commercial World, published in the same year, though allegedly already written in 1829/30.

When doing longitudinal (time series) calculations, it is common to set a value for the base year [citation needed] to make interpretation of the results easier.

In basic microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two nations.

In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres index.

To understand how a country's social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.

As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price.