Terms of Trade is the ratio of the average price of a country’s exports, to the average price of its imports, is its terms of trade. In theory, an improvement in a country’s terms of trade raises its real income (since it can “convert” a given amount of its own output into a larger amount of consumable products through trade) –although in practice it depends on how those terms of trade gains are distributed.
Definition 2.
Terms of trade refers to the weighted average exchange ratio between a nation’s export prices and its import prices, used to measure gains from trade that refers to increases in total consumption resulting from production specialization and international trade.