ABSTRACT
From many a point of view, adjustments in the terms of trade may be regarded as more important than those in the absolute level of prices. They are an indication of how the gains from trade are divided between the countries concerned. This chapter elucidates the factors which determine the direction of possible adjustments in the terms of trade. The assumption that changes in money prices are exactly such as are necessary to maintain the balance of trade in equilibrium under ceteris paribus conditions of supply and demand is, of course, quite arbitrary. The offer curve analysis does not throw any more light on the factors which determine the terms of trade than the supply and demand analysis does. For a change in the terms of trade could there take place only if there was a change in either the price of the aggregate of home-produced goods or in the rate of exchange.
