These can measure the relative changes in prices between the current and base period. If there are qualitative changes in output in the two trading countries during a given period, they remain neglected. In such a situation, net barter terms of trade cannot measured exactly the changes in welfare due to foreign trade in general and terms of trade in particular. If the export price index of a country falls, the import price index remaining the same, there is worsening of the net barter terms of trade.
As export prices are lower than the import prices, the country will be able to get a smaller quantity of import in exchange of the goods exported. The conclusion may be derived that the economic position of the country has deteriorated. It is possible that the fall in export prices has resulted from a fall in costs of producing export goods.
If the productivity in export sector increases at a greater rate than the worsening of net barter terms of trade, the country actually does not suffer due to trade, it rather gains. From this it follows that the net barter terms of trade can sometimes result in misleading conclusions.
The concept of net barter terms of trade is an inappropriate criterion for explaining the distribution of gains from trade between two countries one of which is advanced and the other is less developed. Suppose the import price index has risen relatively less than the export price index in the latter. It signifies an improvement in the terms of trade and the conclusion is derived that the less developed country gains from trade. However, if the profits from foreign investments rise large enough to off-set the increase in export prices, the LDC may not derive any gain from trade.
Similarly, if the export prices fall but there is also an equivalent fall in the profits of foreign investments, the position of the country is not worse off even though the net barter terms of trade are unfavourable. It is, therefore, evident that the distribution of gains from trade cannot be rightly decided on the basis of changes just in the net barter terms of trade.
It is often claimed that the net barter terms of trade provide an index of gains from trade for a country. In this connection, Taussig pointed out that the net barter terms of trade could be an appropriate measure of gains from trade, if the balance of payments of the country included only the receipts and payments on account of exchange of goods and services. However, if balance of payments includes also the capital transactions and unilateral transfers, the gain from trade cannot be determined through the ratio of export and import prices.
The net barter terms of trade are based upon the relative changes in export and import prices over some period between the base year and the current year. If this time interval is too short, there may not be any significant change in the terms of trade. On the contrary, if this duration is too long, there is the possibility of some major changes in the structure of production and demand in the countries such that comparisons on the basis of export and import prices are rendered irrelevant.
The net barter terms of trade concentrate only upon the indices of export and import prices. There is absolute neglect of the factors, which cause variation in these prices. The export and import prices are affected by changes in productivity, costs, wages, general business conditions and reciprocal demand in the trading countries.
Any conclusion concerning the economic position of a country exclusively on the basis of commodity terms of trade cannot be valid. If import prices rise relative to export prices over a period of time, the terms of trade will fall or become unfavourable to the country. The concept of net barter terms of trade has come to be widely accepted as a useful device for measuring short-term changes in trading positions.
Further, it serves as an important index expressing the purchasing power of exports in paying for imports. It is obvious that when a country's terms of trade improve, less of its real product exported will be able to purchase a given unit of real product of the rest of the world and vice versa.
However, the main drawback of this concept of terms of trade is that it reveals nothing about the behaviour of the balance of payments, as it ignores the quantum of trade. Preserve Articles is home of thousands of articles published and preserved by users like you. Here you can publish your research papers, essays, letters, stories, poetries, biographies, notes, reviews, advises and allied information with a single vision to liberate knowledge.
Before preserving your articles on this site, please read the following pages: What is Net Barter Terms of Trade? Net Barter Terms of Trade The ratio between the prices of exports and imports is called the net barter terms of trade or as Viner puts it, "the commodity terms of trade. Where T stands for net barter terms of trade, P stands for price index, x for exports, and m for imports.
Net Barter Terms of Trade. The ratio between the prices of exports and imports is called the net barter terms of trade or as Viner puts it, "the commodity terms of trade." To express this symbolically: Where. T stands for net barter terms of trade, P stands for price index, x for exports, and. m for imports.
The commodity or net barter terms of trade is the ratio between the price of a country’s export goods and import goods. Symbolically, it can be expressed as: Tc = Px/Pm. Where Tc stands for the commodity terms of trade, P for .
If the net barter terms of trade are to be applied to more than one export and import commodities and the changes in terms of trade over a given period are to be computed, the index numbers of export and import prices rather than prices of individual commodities are taken into account. United Nations Conference on Trade and Development, Handbook of Statistics and data files, and International Monetary Fund, International Financial Statistics.
Net barter terms of trade DEFINITION: Net barter terms of trade are the ratio of the export price index to the corresponding import price index measured relative to the base year = What is Net Barter Terms of Trade Index? Definition of Net Barter Terms of Trade Index: Defined as the ratio of a country’s exports price index to its imports price index.