What is Income Terms of Trade?

A refinement in the concept of net barter terms of trade was made by G.S. Dorrance by introducing the concept of income terms of trade. Dorrance defined income terms of trade as the index of the value of exports divided by the price index for imports. Thus:

Where, T stands for the income terms of trade,

P denotes prices, and

Q denotes quantity,

x denotes exports, and

m denotes imports.

The “income terms of trade” are also referred to as country’s “capacity to import”, for p determines Qm. Hence, it may be regarded as a superior concept to net barter terms of trade for the less developed countries’ purposes.