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Terms of Trade

Terms of Trade. PAT. Session 3.1. Learning objectives. After this session, participants should be able to: Explain the terms of trade ( ToT ) concept – definitions, and pros and cons of its usage Explain the implications of trends in ToT for HH FS & for WFP decision-making

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Terms of Trade

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  1. Terms of Trade PAT Session 3.1. Price Analysis Training

  2. Learning objectives After this session, participants should be able to: • Explain the terms of trade (ToT) concept – definitions, and pros and cons of its usage • Explain the implications of trends in ToT for HH FS & for WFP decision-making • Analyze a ToTgraph & identify the implications for FS analysis of the changes in ToT • Calculate the appropriate ToT for particular food groups in the country Price Analysis Training

  3. Terms of Trade Use: • Determine potential deterioration of HH food purchasing power • At macro-level, expressed as ratio of nation’s export prices to its import prices: measures country’s trading position • At micro (HH)-level, ToT measures HH purchasing power as ratio of prices of two different goods ToTij = (Price of good i) / (Price of good j) Price Analysis Training

  4. Terms of Trade Data required: • Time series of ratio of income sources (livestock/food staple, cash crop/food staple, daily wage/food staple by livelihood type) • Generally: the income producing item is in the numerator and the consumption item (the item on which the livelihood group spends its income) is in the denominator Price Analysis Training

  5. Terms of Trade Interpretation • A decreasing (or increasing) ToT indicates potential reduction (or improvement) of HH purchasing power (a decreasing ratio implies income is declining and consumption costs are rising) • Indicates access component of food security • Contributes to identification of appropriate crisis-response strategies Price Analysis Training

  6. ToT Example #1 Rising trend: ToT turning in favour of item in numerator El Geneina, Sudan: Price of two-year female goat / Price of sorghum per ton Rising trend: ToT turning against item in numerator Price Analysis Training

  7. ToT Example #2 Kassala, Sudan: Casual Labour wage rate / Price of sorghum Price Analysis Training

  8. ToT Example #3 Nicaragua: Maize / Coffee Price Analysis Training

  9. ToT Pros & Cons Cons Underlying causes required to explain ToT patterns Price data at geographical location of livelihood group may not be available Impact on HH is implicit but not measured May be misleading as other coping mechanisms may be in force (transfers/remittances, food stocks, wild products…) Pros Simplicity Quick analysis of possible patterns of HH purchasing power Ratio of prices means don’t need to worry about nominal vs. real prices Price Analysis Training

  10. Terms of Trade & Livelihoods With a livelihoods approach, market analysts can differentiate the likely market price impacts on different producers and consumers Example: The same drought that causes meat prices to fall (as herders rush to market to sell off livestock before they die) can cause the price of increasingly scarce maize to skyrocket (thereby benefitting those still able to produce maize Price Analysis Training

  11. Small Group Work Please turn to Workbook Exercise 3.1. The Marketastan File: Terms of Trade in Marketastan (use Excel data file: 3.1. Marketastan ToT Exercise.xls) Price Analysis Training

  12. Marketastan 3.1. Debriefing • Do you agree with the Provincial Commissioner’s statements? • Is he correct that ToT have in recent months shifted severely against wheat producers in favor of pastoralists? • Do you agree these are the worst ToT for northern wheat producers (vis à vis northern pastoralists) in more than a decade? Price Analysis Training

  13. Wrap-up: Terms of Trade - Interpretation & Decision-Making Interpretation • Indicative of HH food access: purchasing power • Indicative of employment of coping strategies • Complementary information needs: • HH dependency on markets for food • HH capabilities to access food through markets • Labour market functioning (unemployment rates and wage rates by season, sector, gender and regions, range of labour market regulations…) Decision-making • Early warning or trigger for deeper assessment • Can contribute to decisions regarding cash or food aid • Can help to inform livelihood specific government policies and corporate policies of global actors on food security strategies Price Analysis Training

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