Terms of TradeToT
Terms of trade compare a country’s export prices with its import prices. When export prices rise faster — for example, oil prices for an oil exporter — the terms of trade improve, which often supports the currency.
Terms of trade compare what a country earns for its exports with what it pays for its imports. Currency and macro traders watch them because a swing in export prices can change a country’s income and its exchange rate.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Terms-of-trade index, Net barter terms of trade
- Updated
Terms of trade in plain words
The terms of trade measure how much a country's exports can buy in imports, and how that changes over time.1
Put simply, it's the price of a country's exports compared with the price of its imports.2
When export prices rise faster than import prices, each unit sold abroad buys more imports.
How to read terms of trade
Get export prices
Use an all-export price index, the numerator in the BLS definition.1
Get import prices
Use the matching all-import price index as the denominator.1
Divide and scale
Divide export prices by import prices and multiply by 100, as the BLS ratio describes.1
Read the direction
A rise means improvement and a fall means deterioration.2
Look for the driver
Check exchange rates and commodity prices, two important and notoriously volatile factors.2
Separate from the trade balance
Don't treat it as a trade-balance measure — the two often move in opposite directions.1
Worked examples
Example 1 — Index calculation
ToT 110A hypothetical country’s export price index is 110 and its import price index is 100.
| Export index | 110 |
| Import index | 100 |
| Terms of trade | 110 |
Export index ÷ import index × 100 gives 110, following the BLS ratio.1
Example 2 — Commodity boom
ImprovesA hypothetical oil exporter sees oil prices rise 30% while import prices stay flat.
| Export prices | +30% |
| Import prices | 0% |
Commodity prices drive the terms of trade strongly, so the same exports now buy more imports.2
Example 3 — Import cost shock
DeterioratesA hypothetical energy importer faces a 40% jump in fuel import prices.
| Import prices | +40% |
| Export prices | +5% |
When import prices increase relative to export prices, the terms of trade decline (deteriorate).2
Terms of trade vs trade balance
| Aspect | Terms of trade | Trade balance |
|---|---|---|
| Measures | Relative prices | Values of flows |
| Unit | Index (base 100) | Currency amount |
| Main drivers | Commodity prices, exchange rates | Volumes and prices |
| Typical use | Income and currency outlook | Growth and external balance |
Where terms of trade are used
Currency analysis
Commodity exporters’ currencies often track their terms of trade.
Macro forecasting
Better terms of trade raise national income and can support Gross Domestic Product.
Inflation outlook
Import price shocks feed into Inflation.
Commodity links
Connect export prices to Fundamental Analysis of a country.
Advantages and disadvantages
Advantages
- Captures income effects of price changes.
- Easy to calculate from price indexes.
- Useful for commodity-linked currencies.
- Comparable over time.
Disadvantages
- Ignores trade volumes.
- Index coverage differs by country.
- Can be revised.
- Easy to confuse with the trade balance.
Going deeper
Read as far as you need. Each level builds on the one before it.
The idea
Beginner
When the terms of trade improve, a country can buy more imports with the same exports.2
Currency channel
Intermediate
A stronger domestic currency can make imports cheaper and so improve the terms of trade.2 The link runs both ways, so cause and effect need care.
Not a surplus measure
Advanced
The terms of trade are not the same as the trade surplus.1 Higher export prices can cut volumes, so the balance may move the other way.
Common mistakes
Treating it as the trade balance
It is a price ratio, not a value.
Ignoring the base year
An index of 110 only means something against its base.
Forgetting volumes
Better prices can come with lower sales.
Assuming one-way causality
Currencies affect prices and prices affect currencies.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Terms of trade are export prices over import prices.
- Above the base means improvement.
- Commodity prices are a key driver.
- They are not the trade balance.
- They matter for commodity-linked currencies.
Frequently asked questions
Is a higher terms of trade good?
Who publishes it?
Does it move currencies?
Further learning
- Economic Indicator
Other macro data.
- Inflation
Import price effects.
- Gross Domestic Product
Income effects.
- Central Bank
Policy responses.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Bureau of Labor Statistics (BLS). Terms of Trade Indexes – Fact Sheet (opens in a new tab) Checked .
- Brookings Institution. What is the terms of trade? (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.