Terms of Trade
Plain definition
The ratio of a country's export prices to its import prices, usually expressed as an index: (export price index / import price index) x 100. An improvement (rise) in the terms of trade means a country can buy more imports for the same volume of exports.
In economics
Rising commodity prices improve the terms of trade of oil and mineral exporters while worsening those of importers. The Prebisch-Singer hypothesis argues that primary-product exporters face a long-run decline in their terms of trade, which is one argument for industrialization in developing countries.
Example
If an oil exporter sells oil at 100 per unit, its terms of trade let it buy 1.2 units of machinery per barrel. If oil falls to $60, the same barrel buys only 0.6 units -- its terms of trade have deteriorated.
Terms of trade is often confused with the trade balance. The terms of trade is a price ratio (how favorable trade is), while the trade balance is a value difference (exports minus imports). A country can have improving terms of trade and a trade deficit at the same time.