The terms of trade (TOT) represent the ratio of a country’s average export prices to its average import prices, typically expressed as an index. This ratio indicates the volume of imports an economy can acquire for a given volume of its exports.

The formula for calculating the terms of trade is:

An improvement in the terms of trade occurs when a country’s export prices rise relative to its import prices. This means that a nation can purchase a greater quantity of imports for the same amount of exports, increasing its purchasing power on international markets. Conversely, a deterioration in the terms of trade signifies that export prices have fallen relative to import prices, reducing the volume of imports that can be financed by a given quantity of exports.