Key terms
- Terms of trade
- A country's terms of trade compare the average price of its exports with the average price of its imports, as an index.
- Balance of trade
- The balance of trade is the value of what a country exports minus the value of what it imports.
The index divides export prices by import prices
Terms of trade = (index of export prices ÷ index of import prices) × 100. Both price indices start at 100 in the same base year, so the terms of trade start at 100 too. A figure above 100 means export prices have risen faster than import prices since then: each unit of exports now pays for more imports. A figure below 100 means each unit of exports pays for fewer imports.