This refers to the rate at which the country’s export exchanges with those from other country. That is:
It determine the value of export in relations to import so that a country can know whether it’s trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries
Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya.
Calculate the Terms of trade for;
This implies that Kenya is importing from China more than it is exporting, leading to unfavourable terms of trade i.e. when the percentage is less than 100%, it implies unfavourable terms of trade.
China (work out)
The average prices is the various prices of the individual export or import items divide their number