Definition
Terms of Trade
Terms of trade is the ratio of a country's export prices to its import prices; rising terms of trade mean exports buy more imports, improving national income.
If India's export prices rise faster than its import prices, its terms of trade improve, the same volume of exports now pays for more imports. Falling terms of trade (e.g. when crude prices surge) squeeze the economy.
Because India imports costly crude oil and exports services and manufactures, a spike in oil prices worsens its terms of trade, widening the current account deficit and pressuring the rupee. Commodity price swings are a major driver of India's terms of trade.
Related terms
- Current Account Deficit (CAD)The current account deficit arises when a country pays more abroad for goods, services and income than it earns, meaning it is a net borrower from the rest of the world.
- Trade DeficitA trade deficit occurs when the value of a country's goods imports exceeds its goods exports, forming a major part of the current account.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Balance of Payments (BoP)The balance of payments records all economic transactions between India and the rest of the world over a period, spanning trade, services, income and capital flows.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.