What is Viner’s Terms of Trade?

Professor Viner has devised another concept as an improvement upon the commodity terms of trade, called “the single factoral terms of trade.” It represents the ratio of the export-price index to the import-price index adjusted for changes in the productivity of a country’s factors in the production of exports.

According to him, “If the commodity terms of trade index was multiplied by the reciprocal of the export commodity technical coefficients index, the resultant index would provide a better guide to the term of gain from trade than the commodity terms of trade index by itself. Symbolically, thus:

Where, Tt_t stands for the single factoral terms of trade index. Fx stands for productivity in exports (which is measured as the index of cost in terms of quantity of factors of production used per unit of export). When Fx is taken for comparison between two periods, it is expressed as p_x which represents the reciprocal of the index of cost in terms of quantity of factors of production used per unit of export.

This index suffers from the shortcoming that, it does not take into consideration the potential domestic cost of production of imports.

To overcome this defect, Viner constructed another index called “Double Factoral Terms of Trade”, as

Which takes account of productivity in the country’s exports, as well as the productivity of foreign factors in the country’s imports. Here, Fm represents import productivity index (which is measured as the index of cost in terms of quantity of factors of production employed per unit of imports).

Kindleberger, however, regards the single factoral terms of trade as a much more relevant concept than the double factoral, because a country is interested in what factors can earn in goods, and not what its factor services can command in the services of foreign factors.

In practice also, Viner’s concepts of single factoral and double factoral terms of trade could not be used because of the difficulties involved in calculating the movements in productivity.

Viner has given one more concept also, known as “real cost terms of trade” to determine the real gain from international trade. Real cost terms of trade is obtained by multiplying the single factoral terms of trade with the index of the amount of disutility (irksomeness) per unit of productive resources used in producing exports (Rx). Thus:

This index suffers from a defect that, it relates only to the amount of foreign goods that a country can get per unit of the real cost involved in the production of exports and neglect imports.

Hence, to overcome this defect, Viner introduces the concept of “Utility Terms of Trade”, by multiplying the “Real Cost Terms of Trade” with the index of the relative utility of imports and the foregone commodities (U). Thus:

Professor Robertson calls this index as the “true terms of trade.”

In practice, however, the real cost terms of trade and utility terms of trade could not be employed because of the difficulties of measuring utilities and disutilities involved in the concepts.

Hence, the commodity terms of trade or net barter terms of trade, i.e., is commonly employed in practice.