The ratio of the index of export prices to the index of import prices. If export prices rise at a faster rate than those of imports, then there has been an improvement in the terms of trade.

‘Since the early 1980s, all developing countries taken together have been experiencing a downward trend in their net barter terms of trade…From a development perspective; the use of the additional income resulting from terms-of-trade changes is of crucial importance. For example, if terms-of-trade gains resulting from higher export prices accrue in the form of higher company profits, and if these are reinvested, the medium-term impact on growth will be much greater than in a situation where the gains accrue to the government through transfers from State-owned enterprises, which are used to service the public debt, or in a situation where they accrue to workers in the form of higher wages that are spent for consumption. Similarly, a deterioration in the terms of trade resulting from higher import prices or lower export prices can lead, inter alia, to either a reduction of investment, an increase in government indebtedness or higher unemployment and wage compression if it is not counterbalanced by productivity and export volume growth’ (UNCTAD Trade and Development Report 2005).

Chung (2007) Int. Econ. J. 21, 1 finds that labour-augmenting technological progress turns the terms of trade against the growing country while capital-augmenting technological progress shifts them in favour of the growing country. Broda (2002) Staff Report, Federal Reserve Bank of New York, 148, on terms of trade and developing countries, is useful.