The Thrust:
Net barter and gross barter terms of trade are incomplete and occasionally misleading indicators of changes in gains of a country from trade; more so if there is a substantial change in the productivity (that is, in the resource cost of production) of its export sector.
Professor Jacob Viner devised the concept of Single Factoral Terms of Trade to overcome this deficiency by adjusting (that is, by multiplying) net barter terms of trade of a country with an index of productivity in its export sector.
Definition:
Single Factoral Terms of Trade (TT,) of a country is the product of its net barter terms of trade and the index of productivity in its export sector. Symbolically, for the Home country H, we may write where, TTc denotes, as before, its net barter terms of trade and Zx is an index of the productivity in its export sector.
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ADVERTISEMENTS:
If the Home country is able to reduce resource cost of its exports then, other things remaining the same, this measure would register an improvement in its terms of trade.’
In other words, it shows that the Home country spends, per unit of imports, a smaller quantity of its productive resources. In contrast, if the resource cost of producing its exports goes up then, other things being equal, this measure would register deterioration in its terms of trade.
It also means that, with a sufficient increase in the productivity in its export sector, gains of a country from trade can increase even with a decline in its net barter terms of trade.
Limitations:
In spite of being better than TTC and TTg, the concept of TT, is not free from certain drawbacks.
ADVERTISEMENTS:
Zxthe index of productivity in the export sector suffers from all the limitations of a typical index number covering a large number of heterogeneous items.
The index of productivity in the export sector has to have the same base period as the one used for export and import price index numbers.
Improvement of productivity in the export sector need not be due to its internal economies. Instead, it may be the result of an improvement in the productivity in its input-supplying sectors (say, due to technological innovations, discovery of new sources of supply, and the like).
In other words, a reduction in the cost of producing exports may be due to the fact that productivity has improved elsewhere in the economy. If that happens, Zxwould not be a true measure of the increase in the productivity of exports sector.
ADVERTISEMENTS:
It is expected that, except in very rare circumstances, an improvement in productivity would be experienced by the entire economy and not by its export sector only.
That way, the cost of import substitution (that is, replacing imports with domestically produced goods) would also fall. By implication, an improvement in the single factoral terms of trade index has a tendency of being over-estimated.