Terms of Trade and Developing Countries

1. Terms of Trade and
Developing Countries
Presented by-
Sagar Kanojia
MBA IB 3rd sem

2.  Terms of trade refers to the rate at which
a country’s exports exchange for its
imports.
 Terms of trade are naturally governed by
the prices of exports and imports entering
in to international trade.
 They indicate a relationship between the
prices of exports and prices of imports.

3. Continued………
 The terms of trade are said to be
favorable to country when the prices of its
exports are high relatively to the prices of
its imports and vice versa.
 For example when USA and Canada are at
trade, if one unit of rice is exchanged for
1.5 units of sugar then terms of trade are
1 unit of rice to 1.5 units of sugar i.e.
1:1.5.

4. Factors Influencing
Terms of Trade
 Cost Differences
 Elasticity of Demand for Imports and
Exports
 Competitive Conditions
 Capital Inflows and Outflows

5. Continued………
 Balance of Payments Position
 Tastes and Preferences
 Technological Changes
 Tariffs

6. Terms of Trade and
Developing Countries
 There is a general feeling that the terms
of trade are normally unfavorable to
developing countries.
 In other words, these countries have to
supply more goods and services in real
terms for a given import of manufactured
goods from the rest of the world.

7. Continued………
 These countries does not have advanced
technology as compared by developed
countries, so their production cost
increases and that’s why they have to
supply more goods and services in real
term.
 On the other hand, developed countries
have much advance technology, so their
cost of production decreases.

8. Causes of Unfavorable
Terms of Trade for
Developing Countries
 Exporters of Primary goods
 Lack of organization
 Unnecessary competition

9. Continued………
 Highly dependent on Export Earnings
 Perishable character of many of the
commodities

10. Thank
You