Terms of Trade
The terms of trade are defined as the ratio of the price of exports to the price of imports.
If the prices of a country’s exports rise faster (or fall more slowly) than the prices of its imports (that is, if its terms of trade improve) fewer exports are needed to pay for a given volume of imports so that at a given level of domestic production goods and services can be reallocated from exports to consumption or capital formation. Thus, an improvement in the terms of trade makes it possible for an increased volume of goods and services to be purchased by residents out of the incomes generated by a given level of domestic production.