The concept of terms of trade refers to the rate at which a country exchanges exports for imports. It expresses a comparison of two values: the export prices and the import prices. In other words, the concept of terms of trade is defined as the ratio of export prices to import prices.

If the prices of imports rise more that the prices of exports, then the terms of trade become unfavourable to, or move against, the country in question because to obtain the same volume of imports, greater volume of exports are to be sold abroad.

Similarly, if the prices of exports rise more than the prices of imports, the terms of trade become favourable to the country.

Types of Terms of Trade

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G.M. Myer has classified various concepts of terms of trade under three broad groups:

(i) Those terms of trade that relate to the ratio of exchange between commodities. They are:

(a) Net barter terms of trade (NBTT)

(b) Gross barter terms of trade (GBTT)

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(c) Income terms of trade (ITT)

(ii) Those terms of trade that relate to the interchange between productive resources. They are:

(a) Single factoral terms of trade (SFTT)

(b) Double factoral terms of trade (DFTT)

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(iii) Those terms of trade that expresses the gains from trade in terms of utility analysis. They are:

(a) Real cost terms of trade (RCTT)

(b) Utility terms of trade (UTT)