This denotes the amount of a country’s exports that are exchanged for its imports. This is calculated using the price index i.e. price index of terms of trade.
= (Price index of exports x 100)/price index of imports
FAVOURABLE TERMS OF TRADE: This is when the prices Of country’s exports are greater than that of her imports.
UNFAVOURABLE TERMS OF TRADE: This is when the prices of a Country’s exports is less than that of her imports.
BALANCE OF TRADE: This is the relationship between the total value of visible exports and that of visible imports.
Note: If the value of visible exports is greater than that of Imports, the balance of trade is said to be favourable. Conversely, if the value of visible imports is greater than that of visible exports, then the balance of trade is said to be unfavourable. This situation can be upset by a surplus in invisible items. But if the value of visible imports is equal to that of visible exports then there is a balance of trade.
Visible Imports and Exports are referred to as tangible goods i.e. physical goods that can be seen and touched while invisible Imports and Exports are intangible i.e. they are referred to services, such as shipping, banking, insurance and tourism charges.