completion of the worksheets in the appendices is to guide the analyst through the steps to
select the appropriate products for this analysis.
In an early warning context, this procedure is used to observe the historical and  current
relationship between two commodities within a given market four ways.  First, it provides a
historical understanding of the relationship between the prices of two commodities in a
given market to understand the pattern of changes in relative prices.  Second, it will capture
any historical deviation or sudden departure of prices (either increases or decreases) from a
normal pattern.  Third, it will capture any rapid price changes in the terms of trade between
different socio economic groups to identify if a particular vulnerable group trading those
commodities in that market has lost value in their commodity relative to the commodities
traded by others.  Finally, it can show changes in the terms of trade between different
commodities in different markets.
It is important to understand what it means when there has been either an increase or
decrease in the relative prices.  For example, the terms of trade for goat/millet are a price
ratio of goat prices (numerator) over millet prices (denominator) for each time period.  An
increase in the terms of trade for goat/millet means that the relative purchasing power for the
sellers of goat has increased relative to sellers of millet.  This can result from either from an
increase in the price of goat, a decrease in the price of millet, or both.  Conversely, a
decrease in the relative terms of trade between goat and millet means that the relative
purchasing power for the sellers of millet has increased relative to sellers of goat.  This can
result either from an increase in the price of millet, a decrease in the price of goat, or both.
An example of the output from this analytical step from  Kayes, Mali during the period of
1990 to 1997 (Figure 5.5) illustrates the behavior of the terms of trade between goats and
millet.
Figure 5.5: An example of the terms of trade analysis
Terms of Trade Analysis for Kayes, Mali: 1990 to 1997
30,000
30,000
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
0
0
Month
Sources: Markets used for MILLET: ML|KAYES|SAP   
Units of MILLET per GOAT
Price of MILLET
Markets used for GOAT: ML|KAYES|SAP   
Price of GOAT
36
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