The commodity terms of trade can be defined as the rate at which a country’s exports are exchanged for its imports in the international market. It is expressed as a relationship between the prices a nation receives for its exports and the prices it pays for imports. In our example in the last table here, by terms of trade we mean the rate at which one unit of Sierra Leone’s rice will exchange for one unit of Nigeria’s Cocoa. The rate of exchange will depend on the relative demand for each of the commodity by each of the countries concerned. If the prices of exports rise higher than those of the imports, the terms of trade are favourable. But when the prices of imports rise higher than those of the exports, the terms of trade are unfavourable.
Therefore, Nigeria can enjoy favourable terms of trade when the value of her exports exceeds the value of her imports. On the other hand, if the value of her imports exceeds the value of her exports, then Nigeria will suffer unfavourable terms of trade.
Measurement of Commodity Terms of Trade
In measuring terms of trade, the index of import prices and index of exports prices are used. It is expressed mathematically as follows:
If the final figure is more than 100, terms of trade are favourable, but if it is less than 100, the terms of trade are unfavourable.