<P> Terms of trade should not be used as synonymous with social welfare, or even Pareto economic welfare . Terms of trade calculations do not tell us about the volume of the countries' exports, only relative changes between countries . To understand how a country's social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows . </P> <P> The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country . If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve . However, this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports . As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price . </P> <P> In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex . Thus, the possibility of errors is significant . </P>

Examine the meaning and significance of terms of trade