Consider the following statements:

1. The Gross Terms of Trade is a ratio of total quantity of imports to that of exports of a given country.

2. The Income Terms of Trade is the value of exports divided by the unit value of imports to reflect how better or worse a country’s purchasing power to imports has become.

3. The Net Terms of Trade of a country is the ratio of the unit price of export to the corresponding unit value of import measured relative to a base year.

Which of the statements given above are correct?

Commodity or net terms of trade (NTT) of a country is the ratio of the unit value (price) of export to the corresponding unit value (price) of import measured relative to a base year.

If this ratio increases, it implies that the country, for every unit of exports it exchanges for imports, is receiving relatively more. If the ratio decreases, then the country is receiving relatively less.

Two other commonly used terms of trade indices are gross terms of trade (GTT) and income terms of trade (ITT).

The GTT is a ratio of total quantity of imports to that of exports of a given country. The ITT is the value of exports divided by the unit value (price) of imports to reflect how better or worse a country’s purchasing power to imports has become. Compared to 2017-18, India’s NTT and GTT have declined by 8.9 per cent and 2.1 per cent during 2018-19, respectively, while income terms of trade have increased by 3.4 per cent. However, all indices of terms of trade have been on an upward trend since 2015-16.

ITT comes out to be the most relevant ToT (terms of trade) indicator for the developing countries, as they are more worried about changes in their capacity to import particularly when they are heavily dependent on commodity imports, such as India being dependent on crude imports. With a rising trend of ITT since the year 2000, India has been steadily increasing its purchasing power to import.