Terms of trade for agriculture
Topic: Land Reforms, the Green Revolution and Farm Subsidies · NCERT: Beyond NCERT
Meaning
Terms of trade for agriculture compare the prices farmers receive with the prices they pay. It is the ratio of prices farmers get for their output to the prices they pay for inputs and consumer goods. It is usually shown as an index:
Terms of trade = (index of prices received ÷ index of prices paid) × 100
A value above 100 means the terms have moved in favour of farming. A value below 100 means they have moved against it. It indicates how profitable farming is.
Example
Suppose crop prices rise 10% (index 110) while prices of fertiliser, diesel and household goods rise 20% (index 120). The terms of trade = 110 ÷ 120 × 100 ≈ 91.7. Farmers are worse off even though they are selling at higher prices.
Don't confuse with
- Terms of trade in international trade: these compare a country's export prices with its import prices. The farm version compares agriculture with the rest of the economy.