terms of trade (international)

terms of trade

average price of exports / average price of imports, representing a country's relative competitiveness internationally
- when export prices rise relative to import prices, there is an improvement in the terms of trade and thus an improvement in living standards (imported goods are cheaper to consumers)
- when import prices rise relative to export, there is a deterioration in the terms of trade and thus decline in living standards (imported goods are more expensive to consumers)

afactors affecting terms of trade

- exchange rate (fall in exchange rates leads to deterioration as they make imports expensive and exports cheap)
- competition (cost of raw material and productivity)
- inflation in different countries (inflation domestically would improve terms of trade as export prices would rise and imports would fall)