Preliminary Concept: Terms of Trade

To discuss those strategies made available through trade manipulation, it is necessary to first have an understanding of some terms and concepts associated with trade theory, as they will be used throughout this chapter with the assumption that the reader already understands how they function and can be applied. They are not difficult to understand, by any means, but they are necessary to fully grasp this chapter. Specifically, a basic grasp of the “terms of trade” and how the terms of trade can be altered is required. The terms of trade are a ratio of the cost of imports relative to the cost of exports for a group. That is to say, terms of trade measure whether the value of a nation’s exports is greater or lesser than the value of its imports (or to put it another way, how much a nation much change the price or quantity of their exports to be equal to or greater than the value of its imports). This is almost exclusively used in the analysis of trade between nations but can very simply be applied to smaller groups, such as between two organizations or even between the departments of a single organization, if accounted for properly.