ECS3702 Semester 2 Assignment 2 2025 -

Due 22 September 2025

1. Define Terms of Trade (TOT) [1 mark]
Terms of Trade (TOT) is the ratio of a country’s export prices to
its import prices. It indicates how many units of imports a
country can purchase per unit of exports. If export prices rise
relative to import prices, the TOT improves; if export prices fall
relative to import prices, the TOT deteriorates.

2. How is Terms of Trade measured [2 marks]

 It is measured using price indices. Specifically one
commonly used formula is:
TOTt=Pexports,tPimports,t×100 \text{TOT}_t = \frac{P_{\
text{exports},t}}{P_{\text{imports},t}} \times 100TOTt
=Pimports,tPexports,t×100
where Pexports,tP_{\text{exports},t}Pexports,t = export unit
value price index in year ttt, and Pimports,tP_{\
text{imports},t}Pimports,t = import unit value price index in
year ttt.
 Indices are usually normalized to a base year (e.g. 100 in
the base year), so you can see how export/import price
relationships evolve over time.
3. What an improvement / decline in Terms of Trade means [4
marks]
 Improvement in TOT (i.e. the index rises) means that for a
given quantity of exports, a country can buy more imports
(because export goods are relatively more valuable
compared to the goods it imports). This tends to increase
real income from trade, improve trade balance (if
quantities hold), reduce pressure on foreign exchange, etc.
 Decline in TOT (i.e. the index falls) means that exports are
fetching less relative to what is paid for imports. The
country must either export more volume (or more value)
of goods to afford the same level of imports. This can hurt
trade balance, reduce purchasing power, worsen living
standards especially if a country depends heavily on
imports for essential goods.
 Also, improvement or decline may be driven by factors
such as global commodity price changes, exchange rate
movements, trade policies, supply‐shocks (weather,
transport), demand shifts in world markets, etc. (Even
though not explicitly asked here, knowing these helps
understanding.)

4. Data & Plot

You are supposed to:
  Download from UNCTAD the Terms of Trade Index, annual
data, 2005-2024 for regions: Africa, Americas, Asia,
Europe, Oceania.
 Plot all five on one line‐graph: x-axis = years (2005-2024),
y-axis = TOT Index, with legend showing which line is which
region. Title, axes labeled, source indicated.

5. Discussion of Trends [8 marks]

You would analyze the graph: look for peaks (years where TOT
high), troughs (low), compare how the regions differ (which
region has higher TOT on average, which more volatile, etc.),
note any common shocks (e.g. global commodity price changes,
global financial crisis, recent pandemic etc) that affect all or
some regions differently.

6. Drivers of Differences [5 marks]

Here you would explain why TOT differs between regions:
export composition (commodities vs manufactured goods),
import composition, global demand for region’s exports,
exchange rate behavior, trade policies / tariffs, transportation
costs, regional supply shocks (e.g. drought, oil price shock),
currency depreciation, etc.
1. Definition of Terms of Trade (TOT) [1 mark]
Terms of Trade (TOT) measure the rate at which a country (or
region) can trade its exports for imports. More precisely, it's the
relative price of a country’s exports compared to its imports. If
export prices rise relative to import prices, the country can
afford more imports for the same exports → this is an
improvement in TOT. If export prices fall relative to import
prices, and imports become more expensive relative to exports,
that is a deterioration (decline) in TOT. UNCTADstat+3UN Trade
and Development (UNCTAD)+3OECD+3

2. How TOT is measured [2 marks]

 TOT is typically measured as an index: the ratio of an
export unit value price index to an import unit value price
index. UN Trade and Development (UNCTAD)
+2UNCTADstat+2
 Mathematically:
TOTt=Pexports,tPimports,t×100TOT_t = \frac{P_{\text{exports},
t}}{P_{\text{imports}, t}} \times 100TOTt=Pimports,tPexports,t
×100
where Pexports,tP_{\text{exports}, t}Pexports,t = export price
index in year ttt, Pimports,tP_{\text{imports}, t}Pimports,t =
import price index in year ttt, base year set to 100.
UNCTADstat+3UN Trade and Development (UNCTAD)+3OECD+3
 Sometimes called net barter terms of trade when only
comparing prices (exports vs imports). There are also
income terms of trade, which incorporate quantities
exported (i.e. how much export volume you sell) to assess
how much import purchasing power your exports
generate. UN Trade and Development (UNCTAD)+1

3. What an improvement or decline in the Terms of Trade

means [4 marks]
Here are the implications:
Change What it means Effects / Interpretation
Country can buy more imports
Export prices for a given volume/value of
are rising exports. Increases purchasing
relative to power on the international
Improvement in
import prices, market. Can help improve
TOT (TOT index
or import trade surplus, strengthen
↑)
prices falling balance of payments, improve
relative to income for export sectors,
export prices. reduce inflationary pressure on
import-competing sectors.
Change What it means Effects / Interpretation
Country must export more (or
value more) goods just to
Export prices
afford the same imports. Can
fall relative to
Decline / worsen trade balance, reduce
import prices,
Deterioration in the real income from trade,
or import
TOT (TOT index squeeze foreign exchange,
prices rise
↓) potentially cause inflation (if
relative to
imports become more
export prices.
expensive), may hurt export
industries.
Also, improvements are not always “good” in all dimensions —
e.g. if the improvement is because export prices are volatile or
because you rely on a narrow set of commodities, there is risk.
Similarly, a decline might happen during periods of global
commodity price drops or import inflation.

4. Data Collection / Regions 2005-2024: TOT Index for Africa,

Americas, Asia, Europe, Oceania
 The UNCTADstat “Terms of Trade” dataset covers the
“merchandise trade unit value export and import indices,
and the net barter terms of trade” for countries and also
aggregates / regions. OECD+3UNCTADstat+3UNCTADstat+3
  To get the data for 2005-2024 for regions (Africa, Americas,
Asia, Europe, Oceania), you’d go to the UNCTADstat Data
Centre, select the TOT / “TermsOfTrade” indicator, then
select the regional aggregates, and then choose the years.
Then export/download as Excel. (You already have the
link.)
I did not find in the sources I checked an already-compiled table
for all those regions covering exactly 2005-2024. So someone
would need to download the data directly from UNCTAD and
compile it.

1. Define Terms of Trade (TOT) [1 mark]

Model answer
The Terms of Trade (TOT) is the ratio (or relative price) of export
prices of a country (or region) to its import prices. It shows how
many units of imports can be obtained for a unit of exports.

2. How is the Terms of Trade measured [2 marks]

Model answer
 It is usually measured using price indices: the export unit
value (price) index divided by the import unit value (price)
index.
 Expressed as an index (often base year = 100), i.e.:
TOTt=Pexports,tPimports,t×100\text{TOT}_t = \frac{P_{\
text{exports}, t}}{P_{\text{imports}, t}} \times 100TOTt
=Pimports,tPexports,t×100
where Pexports,tP_{\text{exports}, t}Pexports,t = export price
index in year t, Pimports,tP_{\text{imports}, t}Pimports,t =
import price index in year t.

3. What does an improvement or decline in TOT mean [4

marks]
Model answer
  Improvement in TOT: when the index rises (export prices
rise relative to import prices, or import prices fall relative
to export prices). This means the country can afford more
imports for the same volume or value of exports; real
purchasing power from trade increases. Leads to
favourable effects on trade balance, foreign exchange
earnings, possibly lower inflation of imported goods, etc.
 Decline / deterioration in TOT: export prices fall relative to
import prices, or import prices increase faster than export
prices. Then the country must export more (or get higher
volumes) to pay for the same quantity or value of imports;
its trade income’s purchasing power falls. This can worsen
balance of payments, reduce foreign currency earnings,
hurt consumers (if imports get more expensive), harm
standard of living, etc.

4-7: Data, Plot, Discussion, Table, Drivers etc.

Data: What you need & how to get it
 Use UNCTADstat: the TermsOfTrade indicator, under
merchandise trade, unit value indices etc. UNCTADstat
 In UNCTADstat Data Centre, select the regions: Africa;
Americas; Asia; Europe; Oceania.
 Select period: 2005 through 2024.
  Download/export Excel (or CSV) with the data for those
indices for the regions.

What I found / What is missing

I was not able to find in public sources (quickly) the exact values
for each region for all years 2005-2024 in one table. The
UNCTADstat site does provide the indicator, but you need to
extract the data manually.

4. Plotting
 Once you have the data, you will make a line chart with
five lines (one per region).
 Horizontal axis: years 2005 to 2024.
 Vertical axis: Terms of Trade Index.
 Title: Something like “Terms of Trade Index by Region,
2005-2024”.
 Source underneath: “Source: UNCTADstat, TermsOfTrade
series, 2005-2024.”

5. Discussion of trends [8 marks]

 Look for peaks (years when TOT high) and troughs (lowest).
  Compare regions: which region has higher TOT overall;
which region more volatility; which region has seen
improvement or decline.
 Possible events that caused peaks/troughs: commodity
price shocks, global financial crisis, price of oil, global
demand, etc.

6. Drivers of differences [5 marks]

Some of the main factors that lead to differences in TOT indices
between regions:
 Commodity composition: regions exporting more
commodities whose prices are volatile (e.g. fuels, minerals)
will see more fluctuations, and their export price
movements may differ from import price movements.
 Import composition: cost of imports (especially oil,
manufactured goods) and whether import prices rise or
fall.
 Exchange rate movements: depreciation can make imports
more expensive, affecting import price index.
 Global demand and supply shocks: e.g. commodity
booms, oil price spikes, wars or supply disruptions.
 Policy, tariffs, trade agreements: different trade policies
can affect price pass-through.
  Inflation differentials: if inflation is high in exporting goods
vs importing goods, indices diverge.

Example of how you might write the full answer (concise,

within 3 pages)
Page 1: Parts 1-3 + plot (with figure)
Page 2: Discussion (trend, differences) + drivers
Page 3: The data table