Following the practice in the literature,
terms of trade is defined as the price of imports relative to the price of exports.
Clarke states that the
terms of trade result is not 'plausible'.
The weaker tendency of real GNI per capita will be due not only to population increase, but also to deterioration in net primary income to and from abroad, as well as in the
terms of trade. GDP will also increase faster than GNI per capita in 2005 and 2006.
Because prices are sticky, policymakers in each country have an incentive to implement policies that manipulate the
terms of trade in their own country's favor (that is, improve the domestic tradeoff between consumption and production by raising the price of home goods relative to that of foreign goods).
Equation (1) is the evolution of the
terms of trade, which is assumed to follow a random walk.
Even though the consequences of the improvement in the
terms of trade here are perfectly analogous to those following the discovery of refrigeration in the previous example, the treatment of these two events by the national accounts differs radically.
The costs imposed on Britain's businesses by European companies in the form of worse
terms of trade equate to over pounds 250 per year for every man, woman and child in the UK.
(3) The foreign (domestic)
terms of trade is given by [p.sup.w] (1/[p.sup.w]).
While propitious external influences -- buoyant US demand and improving
terms of trade -- contributed, favourable performance in the late 1990s also reflected better underlying conditions for growth brought about by the macroeconomic and structural policies pursued over the past decade.
Also apparently mistaken have been various theories' predictions of effects arising from changing
terms of trade (the ratio of export prices to import prices) - for example, convergence in the South of high-tech industries that were a prior Northern specialty (p.
Higher income enjoyed by nation C from its foreign investments results in a positive
terms of trade externality for the exporting nations.(3) Under free trade, foreign investment in any one of the exporting nations causes an unambiguous welfare loss for both the exporting nations.
We call this the factor
terms of trade effect as it corresponds to the standard
terms of trade effect for commodity trade.