Terms of Trade
The ratio of a country's export prices to its import prices.
What is Terms of Trade?
Terms of trade (TOT) measure the relative price of a country's exports compared to its imports. When a country's export prices rise faster than its import prices, its terms of trade improve — meaning it can purchase more imports for the same volume of exports, increasing real national income. Conversely, deteriorating terms of trade mean a country must export more to buy the same volume of imports. Commodity-exporting countries are particularly sensitive to terms-of-trade shocks: when global oil or metal prices collapse, their terms of trade worsen sharply, reducing national income even without any change in export volumes.
Example
Australia's terms of trade surged during the 2000s–2010s commodity boom as Chinese demand drove up prices for iron ore and coal. Between 2002 and 2011, Australia's terms of trade rose roughly 80%, significantly boosting national income and government revenues without any increase in export volumes.