TERMS OF TRADE

TERMS OF TRADE

Definition of terms of trade: Terms of trade may be defined the rate at which a country’s exports exchange for its imports. It is expressed as a relation between the prices a country receives for exports and the prices it pay for imports, other words, terms of trade is the price ra^j between exports and imports. Terms of trade usually measured by the mathematical formular below:

Terms of Trade        =          index of import price            x          100

                                               Index of export price                        1

A county’s terms of trade are said to imp when this ratio increases and to worsen it decreases. The terms of trade are favourable if  the average price of exports is higher than average price of imports. The index of terms trade would therefore be more than 100. If prices of imports, the terms of trade improve, since a given quantity of export pay for more imports. Favourable terms o’ leads to a rise in the real national income.

The terms of trade are unfavorable the average import price is higher average export price which results in more expensive imports than exports and this s worsen terms of trade. When terms of trade are unfavourable, the index would be less than 100 and this reduces the real national income.

Terms of trade in West Africa: Terms in West African countries have been witnessing an unfavourable or worsening trends because the price of their imports have been increasing relative to price of exports.

Reasons for the worsening terms of trade include:

1. Most West African countries are producers and exporters of primary products e.g. agricultural produce and
   crude minerals.
2. They import lots of capital goods in an effort to industrialize, thereby, increasing imports over exports.
3. There has been a fall in the demand for certain primary products of West African countries. This is due to the
   development of substitutes by the developed nations. This leads to a decrease in the price of export and
   increase in prices of imports.
4. The production of low quality of manufactured products is also a problem. This is due to low level of technological development. The importation of high quality manufactured products, therefore increases importation over exportation.

How to improve terms of trade:

The terms of trade can be improved by any method which will increase the price of exports relative to imports. These methods include:

• Use of inflationary policy.
• Appreciation of the currency.
• Imposition of higher export duties on commodities with an inelastic demand.
• A reduction in the demand for imports.
• Through collective bargaining, developing countries could achieve higher prices for their exports.
• Improvement on the quality of manufactured goods.
• There should be increased internal use of primary products in production.

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