Income terms of trade
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Income terms of trade measure how many imports a country's exports can pay for. The measure accounts for both export prices and export volume. Income terms of trade = net barter terms of trade × export volume index, where net barter terms of trade = (Px/Pm) × 100. Px is the export price and Pm is the import price. The measure shows that a country can buy more imports even when export prices fall, as long as it sells enough extra exports.
Example
Suppose India's net barter terms of trade fall to 90 because oil import prices rise. If the export volume index rises to 120, income terms of trade = 90 × 120 ÷ 100 = 108. India's import-buying capacity has still improved.
Don't confuse with
- Net barter terms of trade: this compares only export prices with import prices and ignores how much is exported.
Related concepts
- Purchasing power parity
- Big Mac index
- Real exchange rate
- Nominal Effective Exchange Rate
- Real Effective Exchange Rate
- Terms of trade
- Net barter terms of trade
- Dutch disease