Terms of Trade(TOT) is the amount exported in terms of amount imported. It is index number calculated by formula : (Index of Export / Index of Import) * 100.
Terms of Trade is essential in international trade because it helps to determine desirability of specialization in Trade and also the condition of trade with other countries.
If TOT is 110 (where base year is always 100), it shows that country is being benefited from trade as there is surplus due to excess export of highly value added goods and import of relatively low cost goods.
If TOT is 90, it shows that a nation’s imports exceed exports in terms of value.