Net barter terms of trade
Also called: Commodity terms of trade · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Net barter terms of trade compare the prices a country gets for its exports with the prices it pays for its imports. Net barter ToT = (Px / Pm) × 100, where Px is the export price index and Pm is the import price index. A value above 100, or a rise over time, is an improvement. It means each unit of exports now buys more imports. A fall is a worsening. This measure looks only at prices. It ignores how much a country actually exports.
Example
India imports most of its crude oil. Suppose India's export price index stays at 100 while oil pushes the import price index up to 125. Net barter ToT falls to (100/125) × 100 = 80. India must now export more to pay for the same imports. When oil prices fall, India's terms of trade improve.
Don't confuse with
- Income terms of trade: net barter ToT × export volume index. It measures how much the country can import with its export earnings, so it takes both export prices and export volume into account.
- Real exchange rate: R = eP*/P. It compares overall price levels across countries, adjusted for the nominal exchange rate, not export and import prices.
Related concepts
- Purchasing power parity
- Big Mac index
- Real exchange rate
- Nominal Effective Exchange Rate
- Real Effective Exchange Rate
- Terms of trade
- Income terms of trade
- Dutch disease