Terms of trade

Terms of Trade (TOT)

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Terms of Trade, TOT ）It refers to how many units of foreign countries can be exchanged for each unit of commodity exported by a country in a certain period import The proportion of, or Exchange price comparison It can reflect a country's macro foreign trade economic performance how. Usually, the import deflator and export deflator are used in terms of trade national income And the ratio in the product account.^[1]

Chinese name: Terms of trade
Foreign name: terms of trade
Role: Reflect the economic benefits of a country's macro foreign trade

Definition: How many units of foreign imported goods can be exchanged for each unit of exported goods in a certain period of time
English abbreviations: TOT
Common forms: Price terms of trade, income terms of trade and factor terms of trade

catalog

▪ Evolution of trade system
▪ Variable definition

definition

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Terms of Trade References

Terms of Trade is used to measure a country's exports versus imports in a certain period of time Profitability and Trade interests And reflect the foreign trade situation of the country. Generally Terms of trade index Means, in bilateral trade Especially important.

International trade theory believes that export oriented trade growth will worsen a country's terms of trade, while import oriented growth will improve a country's terms of trade. At the same time, according to paul krugman Of Standard trade model : The improvement of a country's terms of trade will increase a country's Welfare level ； Conversely, the deterioration of terms of trade will reduce the welfare level of a country.^[2]

Common terms of trade have three different forms: Price terms of trade 、 Income terms of trade and Factor terms of trade They measure a country's Trade income 。 Among them, price terms of trade are the most meaningful and easy to calculate based on existing data. The improvement of a country's terms of trade usually refers to that country Export commodity price Relative to imports commodity price Improved.

Calculation formula

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Terms of trade （NBTT）

The commodity price and terms of trade are also called Net physical terms of trade , exported and imported by a country Exchange price comparison , which Calculation formula For:

Terms of trade index=export price index/ Import price index X100%^[3]

Meaning of formula:

If Terms of trade index If it is greater than 1, it means that the export price is relatively higher than the import price, the export of the same amount of goods can exchange more imported goods than the original, and the country's terms of trade in that year are more favorable than the base period, that is, they are improved; If the index of terms of trade is less than 1, it means that the export price is relatively lower than the import price, and the import goods that can be exchanged for the same amount of goods exported are less than the original. The country's terms of trade in that year are worse than the base period, that is, worse.

However, it should be noted that even if the terms of trade of country 1 are improved, we cannot judge that the trade situation of country 1 has improved and that of country 2 has deteriorated. Because the change in terms of trade is the result of the joint action of many forces that have an impact on the country and the rest of the world, we cannot determine the net impact of these forces on the welfare of a country by the change in terms of trade alone.^[4]

INCOME TERMS OF TRADE (ITT)

Export price index And Import price index Ratio * Quantity index of export commodities * 100%

Single factor terms of trade (SFTT)

Terms of Trade Formula

Ratio of export price index to import price index * labour productivity Index * 100%

Two factor terms of trade (DFTT)

The ratio of the export price index to the import price index * the ratio of the labor productivity index of export commodities to the labor productivity index of import commodities * 100% Take a certain period as the base period, first calculate the import and export price ratio of the base period as 100, and then calculate the import and export price ratio of the comparison period. then With Compared with the base period, if it is greater than 100, it indicates that the terms of trade are more favorable than the base period; If it is less than 100, it indicates that the terms of trade are worse than the base period, and the exchange efficiency is worse than the base period.

give an example

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Assume a country Net terms of trade Take 1950 as the base period, that is 100. By 1990, the country Export price index A decrease of 5% to 95; Import price index It increased by 10% to 110. Then, the net terms of trade of this country in 1990 were:

N=95/110×100=86.36

This shows that during the 40 years from 1950 to 1990, Net terms of trade It dropped from 100 in 1950 to 86.36 in 1990. Compared with 1950, the terms of trade in 1990 worsened by 13.64.

influence factor

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There are many factors that affect the terms of trade. Here, only a few main and intuitive factors that affect the terms of trade are analyzed.

Import and export Commodity demand

The demand change of import and export commodities affects the terms of trade by affecting the price of import and export commodities. For a certain commodity, there may be many factors that affect its demand, but what we analyze here is the overall demand for imports and exports of a country. According to the principle of macroeconomics, the main factor determining a country's import demand is its Economic development level The main factor determining a country's export demand is the level of economic development abroad. conventional western economics The theory holds that, for small countries, economic growth will not lead to changes in terms of trade, while for large countries, under the condition of ultra adverse trade growth, the terms of trade of the country will not change in terms of economic growth (and export trade (growth) will be improved instead of falling. In other cases, the terms of trade of the country will decline or deteriorate to varying degrees.

Import and export commodity market organization

This affects the terms of trade by affecting the supply of import and export commodities. When the international market organization of import and export commodities changes, such as the number of suppliers of a certain commodity decreases, the number of existing suppliers will increase monopoly power Therefore, if other conditions remain unchanged, it may lead to the possibility of commodity price rising, which may lead to the possibility of terms of trade declining (this means that this commodity is an import for the country). This paper assumes that the market organization of import and export commodities is in a dynamic equilibrium.

exchange rate

There are two main ways for the exchange rate to affect the terms of trade: one is to affect the terms of trade by affecting the cost of import and export commodities and thus the price of import and export commodities; First, by influencing the import and export of goods Nominal price And affect the terms of trade. But according to Macroeconomics We know that the exchange rate itself is determined by Import and export trade (and International capital flows ）And the fluctuation of exchange rate will affect Price of import and export commodities However, in the long run, the exchange rate will return, and it is impossible for a country's exchange rate to deviate from its equilibrium position for a long time. Therefore, in the long run, the impact of exchange rate on terms of trade is nearly neutral. At the same time, because this article considers the situation in China, and China implements Exchange rate policy Yes dollar Of Pegged Exchange Rate , which is essentially a fixed exchange rate system Empirical analysis Exchange rate is not considered influence factor 。

Composition of import and export commodities

On the Deterioration of Trade Terms An important basis for the opinion is developing country Main export primary products and developed country The export of industrial products is different from the previous factors. This factor does not change the price of one or some import and export commodities, but the composition and proportion of import and export commodities. Because it is export that determines the terms of trade Weighted average price And the weighted average price of imported goods, so when imported goods or exported Composition of goods When the situation changes, even if the prices of various commodities themselves do not change, the weighted average prices of imported or exported commodities will change, thus changing a country's terms of trade. But here we need to note that the change in the composition of import and export commodities is only one country industrial structure This is just a result of the change. For this reason, this paper does not directly analyze the impact of the composition of import and export commodities on terms of trade. Instead, we analyze the impact of changes in a country's industrial structure on terms of trade. Influencing factors of China's terms of trade Empirical analysis

According to the above analysis, three variables are considered in this model: the first variable is Terms of trade index M， It is the regression of this model. The second variable is GDP, which is used as the regression element of the model Real GDP Index. The third variable is the industrial structure index PRO, which is divided according to international trade standards primary products And the output ratio of industrial products. Therefore, this model is a three variable regression model.

Corresponding measures

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Comparison Chart of International Trade Terms

Economic growth and gross domestic product The increase will inevitably lead to the deterioration of the terms of trade. developing country The deterioration of the terms of trade is not an inevitable consequence of economic growth, it is only because of its industrial structure The optimization and upgrading of China's industrial structure lags behind economic growth and the speed of optimization and upgrading of the world's industrial structure. Prebisch demand elasticity On the deterioration of terms of trade of developing countries Inevitability It is unreasonable. According to the data, there is no evidence that the Optimization and upgrading of industrial structure Slower than developed country It is inevitable. China is a large developing country with rich labor force. Compared with developed countries and developing countries, China has a greater possibility of deteriorating terms of trade. From the perspective of industrial structure, the following situations are likely to lead to the deterioration of China's terms of trade while economic growth. Corresponding preventive measure ：

1. Increase investment in education and scientific research, and support the R&D of enterprises. Attention should be paid to the adjustment of various items in the input of education and scientific research, especially in the input of education expenses Education expenditure Proportional arrangement and guidance of educational structure Change occurs. Judging from the current situation, China's higher education has achieved gratifying results, but vocational education , especially Higher vocational education However, it is far behind, which greatly limits the optimization of China's industrial structure, and has become a major problem for many Chinese enterprises and even Industrial development The biggest bottleneck.

2. Accelerate urbanization, especially Urbanization process , through gradual realization Urban-rural integration Realize the evolution and upgrading of the overall industrial layout. At the same time of urbanization traditional agriculture And increase investment in agricultural scientific research.

3. Realize and promote Regional industry To be undertaken by echelon. This undertaking includes two aspects. On the one hand international market On the one hand domestic market 。 In the international market, we should realize the echelon undertaking of (large) regional industries, and in the domestic market, we should accelerate the echelon undertaking of (small) regional industries. To ensure the smooth realization of these two aspects, the government needs to adopt various policies to guide and arrange.

4. Attention guidance foreign investment Play an active role in the optimization and upgrading of the industry. Research shows that foreign investment in Industrial optimization and upgrading The role of is not significant, which may be related to the early stage of China Introduce foreign capital In the early stage, China introduced foreign capital mainly to solve the problem of insufficient funds (and partly to solve the problem of regional employment). In the case that China's domestic funds have been relatively sufficient, we should focus on promoting the optimization and upgrading of industries to attract foreign investment.

Evolution

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Evolution of trade system

Terms of Trade Related Chart

The reform of China's foreign trade system really started in 1988 Economic system reform However, China's foreign trade has not been liberalized export trade It has always been to meet the needs of the country to earn foreign exchange through export market demand In this case, the calculated terms of trade lose its original economic meaning. regression equation M=c (1)+c (2) GDP+c (3) PRO According to the data from 1990 to 2000 least square method The regression result of the model is: M=-0.01017282-0.006137GDP+1.142956PR0 industrial structure It has a positive effect on terms of trade. When the industrial structure index rises by one unit, Improved terms of trade 1.143 units, this effect is when Significance level 0.0001 is significant; At the same time, when the real GDP index changes (increases) by one unit, the terms of trade will decrease (worsen) by 0.0061 units. It is worth noting that this effect is still not significant when the significance level is 0.1 in statistics. In this article regression model The regression effect is better; R2 is also very high, and the corrected R2 is close to 0.9, which means that although there may be many factors affecting terms of trade in theory, the two factors considered in the model Explanatory variable Most of the changes in terms of trade have been explained. In the evolution of China's terms of trade, most of the changes in terms of trade can be made by China industrial structure The impact of GDP change or growth on terms of trade is negative, but the impact is small, and Uncertainty 。 This is in accordance with the Western economic theory From China as a Economic Powers The conclusions are consistent. Because western economic theories believe that for large countries, there is a reverse relationship between economic growth and terms of trade. From the regression results, we can find that China's terms of trade and economic growth show a negative relationship statistically, but this relationship is not significant for various reasons, This also proves that China has become an economic power to some extent. From the regression results, GDP does not have a good ability to explain the terms of trade, and there is no inevitable relationship between GDP and terms of trade. The variables that can better explain the changes in China's terms of trade are industrial structure 。 This is consistent with the emphasis of Peibi and Singer's theory developing country One of the main reasons for the deteriorating terms of trade is product price Variable Asymmetry Is consistent. Compared with secondary products Boom cycle Of Ascending stage ， Price of primary products Often in stalemate In the declining phase of the business cycle, primary products However, the price of may be plummeting. In other words, the prices of primary products tend to show an asymmetric growth that does not rise or slightly rises when rising, but sharply falls when falling. China is not only a developing country, but also a developing country. The reason why China can avoid the deterioration of the terms of trade is that China has realized the optimization and upgrading of its industrial structure while growing its economy.

Variable definition

X， exit Quantity of goods 。 M， Quantity of imported goods. M is Elasticity of import demand , E x is export demand elasticity, SM is import Elasticity of supply Sx is Export supply elasticity (elasticity is absolute value )。

Px is Home Currency Counted Export price PM is the import price in local currency, PX * the export price in foreign currency, and PM * is the import price in foreign currency.

E is Direct pricing method And Q is the terms of trade. Determined for foreign currency import requirement And exports Supply Is the price in local currency, so there are:

When the local currency depreciates, there is de>0, and because the elasticity is absolute, the sign of (11) depends on the positive and negative (EXEM-SXSM). therefore Depreciation of local currency The change of trade terms depends on the import and export supply demand elasticity When the local currency depreciates, the basic conclusion is:

When SxSm ＞ ExEm, that is Elasticity of supply When the product of is greater than the product of demand elasticity, the terms of trade deteriorate;

When SxSm<ExEm, that is, the product of supply elasticity is less than the product of demand elasticity, Improved terms of trade ;

When SxSm=ExEm, that is, the product of supply elasticity is equal to the product of demand elasticity, the terms of trade remain unchanged.

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