In economics, terms of trade refer to the relationship between how much money a country pays for its imports and how much it brings in from exports. When the price of a country's exports increases over the price of its imports, economists say that the terms of trade has moved in a positive direction. The TOT is expressed as a ratio of import prices to export prices, that is, the amount of imported products/commodities that an economy can purchase, per unit of exported products/commodities. Any improvement that occurs in a country's TOT is beneficial to the economy because it means that the country can purchase more imports for the particular level of exports.
For example, in a
bilateral trading arrangement, the trade agreement occurs between two
countries. Let's suppose that agricultural products are grown in Bangladesh,
while biological fuels are produced in Malaysia. The price that Malaysia
charges for its exports of biological fuels is $24,000,000.00 a year, and it
pays Bangladesh $19,000,000.00 for the produce it imports. At the end of the
year, Malaysia would have exported $5,000,000.00 ($24,000,000.00 -
$19,000,000.00) more than it has imported.