The concept of net barter terms of trade was introduced by F. W.. Taussig . Jacob Viner called it as commodity terms of trade . It is defined as the. Terms of trade represent the ratio between a country's export prices and its import prices. When the TOT is greater than %, the country is accumulating more capital from exports than it is spending on imports. Changes import and export prices impact the TOT, and it's pertinent. Terms of trade, relationship between the prices at which a country sells its exports and The concept is also applied to different sectors within an economy (e.g.
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It will be seen from Fig. By joining point T with the origin we get the price-ratio line OT whose slope represents the equilibrium terms of trade which will be finally settled between the two countries. At any other price-ratio line the offer of a product by country A in exchange for the product of the other would not be concept of terms of trade to the reciprocal offer and demand of the other country B.
Terms of Trade - TOT
But at this price-ratio line OP country A would demand much greater quantity of wheat UW for OU of cloth as determined by point W at which the offer curve of country A intersects the price ratio line OP.
This will concept of terms of trade in rise in price of wheat and the price-ratio line will shift to the right until it reaches the concept of terms of trade position OT or OP4. On the other hand, if price ratio line lies to the right of Or for instance, if it is OP,then, as will be observed from Fig.
However, with terms of trade implied by the price ratio line OP4, the country B would demand OZ of cloth for ZS quantity of wheat as determined by point S. It therefore follows that only at the terms of trade implied by the price ratio line OT i.
Terms of Trade: Concepts, Determination and Effect of Tariff on Term of Trade
We therefore conclude that the intersection of the offer curves of the two countries determines the equilibrium terms of trade. As explained above, the offer curves of the two countries are determined by their reciprocal demand.
Any change in the strength and elasticity of reciprocal demand would cause a change in the offer curves and hence in the equilibrium terms of trade. It is worthwhile to note that terms of trade must settle within the price lines OP1 and OP7 representing concept of terms of trade domestic rates of exchange between the two commodities in the two countries respectively as determined on the basis of production cost and s demand conditions existing concept of terms of trade them.
When the terms of trade are settled within these limits set by these price lines OP1 and OP7, both countries would gain from trade, though one may gain relatively more than the other depending on the position of terms of trade line.
Terms of trade - Wikipedia
Effect of Tariff on Terms of Trade: The various countries of the world have imposed tariffs i. It has been said concept of terms of trade favour of tariffs that through them a country can provide not only protection to its industries but under appropriate circumstances it can also improve its terms of trade, that is, tariffs under favourable circumstances enable a country to get its imports cheaper.
These favourable circumstances are: Under these circumstances, as a result of the imposition of tariff by that country, the imports of the country will decline since the price of the imported commodity will rise.
But this is not the end of the story.
Concept of terms of trade decline in imports of the tariff-imposing country would reduce the export earnings of its trading partner as it will lead to the decrease in demand for it exported commodity. The decrease in demand for the exported commodity in the trading partner would result in lowering its domestic price.
As a result of the fall in the domestic price of the exported commodity and in order to maintain its export earnings the exporting country is likely to concept of terms of trade the price of its exports. This means that the tariff- imposing country would now be able to get its imports at a relatively lower price than before.
Terms of Trade (TOT): Concept and Gains (With Calculation)
Given the demand and price of its exports, the fall in its prices of imports of the tariff- imposing country would imply the improvement in its terms of trade.
The effect of tariff on the concept of terms of trade of trade can be explained through the geometrical device of offer curves.
These offer curves intersect at T implying thereby that terms of trade equal to the slope of OT are determined between them.