Reasons for differences in terms of trade between countries

Business studies study module

The terms of trade may differ due to:

  • The nature of the commodity being exported. If a country exports raw materials, or unprocessed agricultural products, its terms of trade will be unfavourable, as compared to a country that exports manufactured goods
  • Nature of the commodity being imported. A country that imports manufactured goods is likely to have unfavourable terms of trade as compared to that which imports raw materials or agricultural produce
  • Change in demand for a country’s export. An increase in demand for the country’s export at the world market will make it have favourable terms of trade as compared to those with low demand at the world market
  • Existing of world economic order favouring the products from more developed countries. This may make the developing countries to have deteriorating terms of trade
  • Total quantity supplied. A country exporting what most countries are exporting will have their products trading at a lower price, experiencing unfavourable terms of trade as compared to a country that export what only few countries export
  • Trade restrictions trading partners. A country with no trading restrictions is likely to import more products, leading to unfavourable terms of trade, as compared to if it impose trade restrictions

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