Terms of trade measures the relative price of a country's exports against its imports, expressed as the ratio of an export price index to an import price index, and indicates how many units of imported goods a country can buy for a given quantity of its exports. An improvement in the terms of trade means a country can acquire more imports for the same volume of exports, effectively raising its purchasing power on world markets, while a deterioration has the opposite effect. Exchange rate movements are a major influence on the terms of trade, since a stronger domestic currency tends to lower the price of imports without necessarily changing export prices to the same degree.
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