Definition of terms of trade: Terms of trade may be defined as 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 pays for imports, other words, terms of trad is the price raj between exports and imports. Terms of trade are usually measured by the mathematical formulae below:
Terms of Trade = index of import price x 100
Index of export price 1
A county’s terms of trading are said to improve when this ratio increases and to worsen it decreases. The terms of trade are favourable if the average price of exports is higher than the average price of imports. The index of terms trade would therefore be more than 100. If the prices of imports, the terms of trading improve, since a given quantity of export pay for more imports. Favourable terms lead to a rise in the real national income.
The terms of trading are unfavourable the average import price is the higher average export price which results in more expensive imports than exports and this s worsen the terms of trading. When terms of trade are unfavourable, the index would be less than 100 and this reduces the real national income.
Terms of trading in West Africa: Terms in West African countries have been witnessing an unfavourable or worsening trend because the price of their imports has been increasing relative to the price of exports.
Reasons for the worsening terms of trade include:
- Most West African countries are producers and exporters of primary products e.g. agricultural produce and
crude minerals. - They import lots of capital goods in an effort to industrialize, thereby, increasing imports over exports.
- There has been a fall in the demand for certain primary products in 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
an increase in the prices of imports. - The production of low-quality manufactured products is also a problem. This is due to the 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 trading can be improved by any method which will increase the price of exports relative to imports. To improve terms of trade, which refers to the ratio at which a country’s exports can be exchanged for imports, there are several strategies that can be pursued. Here are some key approaches:
Diversify export base: One way to improve terms of trade is by diversifying the range of products a country exports. By expanding the export base beyond a narrow range of commodities, a country can reduce its reliance on a single industry or product. Diversification allows for better negotiation power and the ability to capture higher prices for exports.
Enhance productivity and competitiveness: Increasing productivity and competitiveness in export industries can lead to higher-quality goods and lower production costs. This can be achieved through investments in technology, research and development, infrastructure, and human capital. By improving efficiency and competitiveness, a country can strengthen its position in international trade and negotiate better terms.
Promote value-added production: Shifting towards producing goods with higher value-added components can contribute to improved terms of trading. By focusing on activities that involve more advanced technology, design, and innovation, a country can capture a larger share of the value created in the production process. This often results in higher prices and improved trade terms.
Invest in trade facilitation: Simplifying and streamlining trade procedures and reducing trade barriers can enhance trade efficiency and reduce transaction costs. Improvements in customs processes, logistics infrastructure, and border management can expedite the movement of goods, reduce delays, and enhance competitiveness. This can have a positive impact on a country’s terms of trade.
Engage in regional integration and trade agreements: Participating in regional integration initiatives and negotiating favourable trade agreements can provide countries with increased market access and preferential treatment. By expanding trade relationships and reducing barriers within a regional bloc or through bilateral agreements, countries can benefit from improved terms of trading with their partners.
Manage exchange rate policies: Exchange rates can significantly influence a country’s terms of trade. A competitive exchange rate can make exports more attractive by lowering prices, while also making imports relatively more expensive. Careful management of exchange rates can help improve a country’s terms of trade, but it requires a balanced approach considering other economic factors.
Strengthen domestic institutions and governance: Effective governance, strong institutions, and transparent policies are crucial for attracting investments, promoting economic growth, and improving trade terms. By establishing a favorable business environment, enforcing property rights, combating corruption, and ensuring a level playing field, a country can enhance its attractiveness for trade and investment, leading to improved terms of trade.
- 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 in the quality of manufactured goods.
- There should be increased internal use of primary products in production.
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