Terms of Trade

Terms of trade (TOT) is an index that captures the relative price of what a country sells to the rest of the world versus what it buys. It is typically expressed as an index number (100 as a base year), where a value above 100 means export prices have risen relative to import prices since the base period. The U.S. Bureau of Labor Statistics publishes monthly import and export price indexes that together allow calculation of terms of trade movements.

A favorable shift in terms of trade — a TOT improvement — means the country can import more for the same quantity of exports. This functions as an income gain for the economy, improving real purchasing power even if nominal trade volumes are unchanged. Commodity-exporting economies such as Australia, Canada, and Norway experience dramatic TOT swings driven by global commodity prices. When oil prices rise, oil exporters enjoy TOT improvements; oil importers like Japan face TOT deterioration.

The United States, as a large diversified exporter of manufactured goods, agricultural products, and services, experiences more moderate TOT fluctuations than commodity-dependent economies. However, periods of dollar appreciation can worsen U.S. export competitiveness by raising the dollar price of U.S. goods for foreign buyers, which can reduce export demand even when TOT as conventionally measured is stable.

TOT deterioration — when import prices rise faster than export prices — effectively acts as a tax on the domestic economy by forcing it to give up more exports to pay for the same volume of imports. During the 2021-2022 commodity price surge, the U.S. experienced TOT pressure as energy and goods import prices rose sharply.

For investors tracking multinational corporations, TOT trends affect revenue translation for exporters and input cost dynamics for import-dependent manufacturers. A sustained TOT improvement typically benefits the traded goods sector and supports corporate profit margins.