Terms of trade basically reveals the competitiveness of the country with reference to the exports v/s the imports that it does.
Thus, we can define the terms of trade in:
1) gross terms of trade: prices of exports/ prices of imports
2) net terms of trade: quantity of imports/ quantity of exports
3) income terms of trade: revenue from exports/ revenue from imports
These can be formulated using the Laplaye's or the Paasche's index formulas. Note here that the exports and imports here are corresponding to the whole basket of goods that the country engages in and not one particular item.
This would measure the differences that have happened over the years and hence would reflect the balance of trade parameters in our fiscal position.
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