Terms of Trade Indexes

How do import price movements vary based on where they come from? How do export price movements vary based on where goods go? Those are measured in the import price indexes by locality of origin and the export price indexes by locality of destination. How does that help to measure U.S. competitiveness in the global marketplace? By taking a locality of destination index for a given locality and dividing that by the corresponding import price index, you calculate a measure of the purchasing power of exports in terms of imports, known as the U.S. terms of trade with that particular locality.

Background

The growth of the global marketplace has generated interest among the general public for measuring the competitiveness of U.S. import goods in the domestic market and U.S. export goods in international markets.

What are the Locality of Origin Import Price Indexes?

The locality of origin import price indexes measure U.S. import prices of goods based on the country, region, or grouping from which items are directly imported. The BLS publishes the indexes at the all-import level, including a break-out by select industries where sufficient data are available.1 Import prices and types of goods may vary based on where imports come from. Each locality of origin import price index reflects the underlying composition as well as the monthly price change of U.S. imports from foreign countries, regions, or groupings.

What are the Locality of Destination Export Price Indexes?

The locality of destination export price indexes are the counterpart to the existing locality of origin import price indexes. The localtiy of destination indexes measure U.S. export prices of goods based on the country, region, or grouping to which items are exported. The BLS publishes the indexes at the all-export level, including a break-out by manufacturing and nonmanufacturing industries where sufficient data are available.2 Export prices and types of goods may vary based on where U.S. exports are sold. Each locality of destination export price index reflects the underlying composition as well as the monthly price change of U.S. exports to foreign countries or regions.

What are the Terms of Trade Indexes?

A terms of trade index measures the change in the purchasing power of exports relative to imports for a given country. In technical terms, the terms of trade index is defined as the ratio (multiplied by a hundred) of the all-export price index for a country, region, or grouping divided by the corresponding all-import price index.

In simple terms, the more a country receives for exported goods, the greater the amount of imports the country can purchase. Take for example the hypothetical case where the United States exports oranges to Canada and receives maple syrup in return. If the price for oranges doubles relative to maple syrup, the U.S. terms of trade with Canada will improve as the United States will be able to import twice as many bottles of maple syrup for the same number of oranges exported to Canada.

The new U.S. terms of trade indexes produced by the BLS are available for each country, region, or grouping for which both a locality of destination and locality of origin price index are published. Previously, the only measures of U.S. terms of trade were the all-world terms of trade indexes produced by the U.S. Bureau of Economic Analysis (BEA), beginning in 1929 and covering U.S. trade in goods and services; goods; and goods excluding petroleum. (See link to BEA table 1.8.6.)

Terms of trade indexes are not measures of the trade surplus, and, in fact, tend to move in the opposite direction. The trade surplus is defined as the value of a country's total exports minus total imports. Generally when prices rise, quantity demanded falls and vice versa. So when export prices rise relative to import prices, by definition the terms of trade index rises. But higher export prices relative to import prices tend to result in a drop in quantity demanded for exports compared to imports, which is a decline in the trade surplus. At the point that a country exports less than it imports, the trade surplus is negative, commonly called a trade deficit.

BLS Terms of Trade Index Calculation

BLS terms of trade indexes measure the change in the U.S. terms of trade with a specific country, region, or grouping over time. BLS terms of trade indexes cover the goods sector only.

To calculate the U.S. terms of trade index, take the U.S. all-export price index for a country, region, or grouping, divide by the corresponding all-import price index and then multiply the quotient by 100. Both locality indexes are based in U.S. dollars and are rounded to the tenth decimal place for calculation. The locality indexes are normalized to 100.0 at the same starting point.

TTt=(LODt/LOOt)*100,

where

TTt=Terms of Trade Index at time t
LODt=Locality of Destination Price Index at time t
LOOt=Locality of Origin Price Index at time t

The terms of trade index measures whether the U.S. terms of trade are improving or deteriorating over time compared to the country whose price indexes are the basis of the comparison. When the index rises, the terms of trade are said to improve; when the index falls, the terms of trade are said to deteriorate. The level of the index at any point in time provides a long-term comparison; when the index is above 100, the terms of trade have improved compared to the base period, and when the index is below 100, the terms of trade have deteriorated compared to the base period.

Example

So, what do the terms of trade indexes tell us? They broadly describe the relative trade competitiveness over time between the United States and its trading partners. Take for example the U.S. terms of trade indexes with Canada and with China. The April 2018 index value for Canada is 101.6 compared to the April 2018 index value for China of 102.2. Looking at the period between December 2017--the index starting point--and April 2018, the terms of trade with China increased 2.2 percent compared to only a 1.6-percent advance in the terms of trade with Canada. The U.S. terms of trade with both China and Canada rose over the December 2017-April 2018 period. But the index values do not indicate the United States has higher overall terms of trade with China than with Canada; rather the terms of trade have increased relatively more with China over the December 2017-April 2018 period than with Canada.

More Information

For more detail on terms of trade indexes, please see U.S. Import and Export Prices and the Terms of Trade.

Additionally, the BLS has published a number of articles on the locality of origin import price indexes used to derive the terms of trade indexes. See links below.

New international price series published by nation and region

China's Exchange Rate Policy Reflected in U.S. Import Prices

The Impact of the European Debt Crisis on U.S. Import Prices

The Impact of the Earthquake in Japan on U.S. Imports

The impact of the falling yen on U.S. import prices


Footnotes:

[1]The all-import level for U.S. imports refers to all imports from a specific foreign country, region, or grouping. The indexes are listed by the name of the country, region, or grouping in table 7 in the monthly Import and Export Price Indexes News Release.

[2]The all-export level for U.S. exports refers to all exports to a specific foreign country, region, or grouping. The indexes are listed by the name of the country, region, or grouping in table 8 in the monthly Import and Export Price Indexes News Release.

 

Last Modified Date: September 14, 2018