Chapter 6


Box 6.7: Terms of Trade

'Terms of Trade' are a measurement for the change of conditions in international trade. The following Terms of
Trade concepts can be distinguished:

1) Commodity or Barter Terms of Trade that indicate changes in prices of export commodities in relation
 to the price changes of import commodities. If the prices of exported commodities fall and/or the prices
 of imported commodities increase, the Terms of Trade decline, and a country has to increase its export
 volume in order to maintain a certain level of imports (and vice versa). As they are easy to calculate, the
 Commodity Terms of Trade are the most commonly used indicator of the changing position in
 international trade.

 2) Income Terms of Trade measure the total export proceeds of a country (export volume multiplied by
 export prices) in comparison with the total expenditures for imports (import volume multiplied by export
 prices). Decreasing Commodity Terms of Trade lead to declining Income Terms of Trade if price
 changes are not compensated by a corresponding increase in the volume of exports. or a corresponding
 decrease in the import volume.

3) Factor Terms of Trade take, in addition to price changes, differences in productivity into consideration.
 They answer the question, how much can be imported for a given level of labour or capital input in
 export production (Single Factor Terms of Trade), or what is the rate of exchange of factor inputs in
 export production for factor inputs abroad in imported goods. To give an example: A skilled worker in
 Germany had to spend his wage income of 22 working days in order to buy a Indian carpet which was
 produced by an Indian carpet knitter in 240 working days (Hetmeier 1991).

Source: M. Metz, Ungleiche Bedingungen im Welthandel Bringt das neue GATT-Ahkommen I"crhesscrungen
f.r die 3. Welt? (Unequal conditions in international trade Does the new GATT Agreement bring about
improvements for the 3rd World?), Zeitschrift fir Sozialokonomie, 3.1995



Declining Terms of Trade and highly fluctuating export prices and volumes have substantial
repercussions for the food security situation of the affected countries and their populations.
These factors affect the financial capacity of the countries to import the food they need in
order to stabilise and to increase internal market supplies, and they contribute to the low
levels of household income. This leads to a widening of market supply/import deficit as well
as the demand deficit.

Reasons for the worsening position of many developing countries are not only the "invisible
hand of the market" that distributes the gains from international trade according to differences
in market power, but also protection policies pursued by industrial as well as developing
countries. A wide range of tariff- and non-tariff barriers are imposed on external trade
transactions. Protection contradicts the ideal and the growth and welfare prospects of a free
international trade system. This became a major subject of concern for the international trade
negotiations under GATT (General Agreement on Tariffs and Trade).

4.2 Implications of the GATT Uruguay Round Agreement

After seven years of negotiations, the last Uruguay Round Agreement under GATT was
successfully concluded in December 1993. Although earlier GATT Agreements had already
brought about a substantial reduction of tariff barriers on a world-wide level, certain sectors.
such as agriculture and textiles (which are specifically interesting for the economies of


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