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What Do We (and Others) Mean by "The Terms of Trade"?

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  • Alan V. Deardorff

    (University of Michigan)

Abstract

I explore how the concept of Òthe terms of tradeÓ has been used since it was coined by Marshall. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and was followed in this choice by almost all writers for the next several decades. Then, around 1980, TaussigÕs choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to VinerÕs argument for preferring that the terms of trade of a country be defined as the relative price of its exports.

Suggested Citation

  • Alan V. Deardorff, 2016. "What Do We (and Others) Mean by "The Terms of Trade"?," Working Papers 651, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:651
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    File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers651-675/r651.pdf
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    Keywords

    Terms of trade;

    JEL classification:

    • F1 - International Economics - - Trade

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