Terms of Trade - TOT

 Terms of trade (TOT) is the value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports).

Using the terms of trade to determine the health of a country's economy can draw the wrong conclusions. It is important to know why exports increase relative to imports, especially since the terms of trade are directly impacted by changes in export and import prices. Terms of trade measurement is often recorded in an index for economic monitoring.

 For example, if, over a given period, the index of export prices rises by 10% and the index of import prices rises by 5%, the terms of trade are:

110  x 100 / 105 = 104.8

This means that the terms of trade have improved by 4.8%.

When the terms of trade rise above 100 they are said to be improving and when they fall below 100 they are said to be worsening.