Variations in the terms of trade, the ratio of export prices to import prices, can have important and diverse influences on the current account of the balance of payments and on other economic aggregates. This article identifies and analyses some of these influences, as they apply to the United Kingdom. The article starts by showing how changes in the prices of traded goods have contributed to changes in the current balance and then looks at the construction of various measures of the terms of trade. Movements in export and import prices and in the terms of trade are analysed, and the importance of relative primary product prices examined. The relationships between changes in the terms of trade and changes in competitiveness and the exchange rate are then briefly considered. The final section sets out some conclusions.
Published on
01 September 1978
The terms of trade