Terms of trade

Terms of trade is the ratio of a country's export prices to its import prices, and it rises when exports get relatively more expensive or imports relatively cheaper.

Terms of trade compares the prices a country receives for what it sells abroad to the prices it pays for what it buys, expressed as a ratio between the two. When export prices rise faster than import prices, a country’s terms of trade improve, meaning the same volume of exports now buys more imports than before.

Commodity-exporting countries often see sharp swings in their terms of trade as global prices for their main export, whether oil, copper, or a farm crop, rise and fall independently of what they import. A large improvement in terms of trade acts much like a national pay raise, boosting purchasing power without any change in how much the country actually produces, though it can also mask underlying economic weaknesses, a pattern examined further in Dutch disease and the resource curse.