Terms of Trade

A country’s terms of trade represents the relationship between the price it pays for imported goods and the price it receives for its exported goods.

If the prices received for exports exceeds what it pays for imports, a country’s terms of trade is said to be favourable as it means fewer exports have to be sacrificed to obtain a given amount of imports.  If the prices received for exports are lower than that paid for the imports, then the terms of trade is not favourable and more exports have to be sold to purchase a given amount of imports.

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