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Terms of trade measures a country’s trading efficiency.

It’s a ratio that compares a country’s exports to its imports. It’s calculated by dividing the value of exports by the value of imports, and then multiplying by 100.

If a nation is exporting goods worth $500 million in a given time frame and importing $450 million in goods during that same time period, its terms of trade is 111%.

A terms of trade figure higher than 100 percent means the country exports a higher value of goods than it imports. It’s accumulating capital, and it can buy more imports if necessary.

If in the next time period that nation’s exports remain at $500 million, but its imports rise to $550 million, its terms of trade will fall to 91%. A figure below 100% means the country is spending more capital on imported goods than it’s bringing in.

Variables like the exchange rate and fluctuations in the prices of commodities can impact a nation’s terms of trade. In using terms of trade to assess a nation’s economy, it’s important to know why its exports and imports change in value.

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