What it means
An import price index follows the prices a country pays for foreign goods, usually measured at the border before tariffs and domestic taxes are added. An export price index follows the prices received for domestic goods sold overseas.
Each index is built by collecting prices on a fixed basket of products from a sample of traders month after month. The figures matter because imports feed directly into costs.
When the price of imported fuel, components or food rises, businesses that rely on them see their costs go up, and that often passes into consumer prices a few months later. Central banks therefore watch import prices as an early signal of inflation that originates outside the economy.
Exchange rates are a major driver. If a currency weakens, foreign goods become more expensive in the home currency, so import prices rise even if the foreign seller has not changed its price.
In the same way, a weaker currency makes exports cheaper for foreign buyers, which can lift demand for them. The two indexes together give the terms of trade, which compare export prices with import prices.
When export prices rise faster than import prices, the country can buy more imports for each unit of exports, and its trade position improves. When the opposite happens, the country needs to sell more to pay for the same imports.
Businesses use these indexes in contracts and planning. Many long-term supply agreements include price adjustment clauses linked to an index, and finance teams use them to test the effect of future price moves on margins.
An importer might build scenarios in which the relevant index rises 5% or falls 5% and see how profit responds. The nuance is that the indexes measure prices, not volumes or values.
A rise in the import price index does not mean the country is importing more, and a fall does not mean it is buying less, so the figures must be read together with trade volume data.
In practice
Real-world examples.
Example
A furniture retailer imports most of its stock. When the import price index for manufactured goods rises 6% in a year, the finance director raises the budgeted cost of goods by that amount and decides which price increases to pass on to customers.
Example
A commodity exporter sees its export price index fall 15% after a drop in world prices for its main product. The treasury team cuts forecast foreign currency receipts and asks the bank to review its hedging.
Example
A central bank economist notices that the import price index has risen for six months in a row after a currency fall. She warns the policy committee that consumer inflation is likely to rise in the following quarters.
Formula
Calculation
Terms of trade = (export price index / import price index) x 100
Suppose a country's export price index is 110 and its import price index is 125, both measured against the same base year. The terms of trade are (110 / 125) x 100 = 0.88 x 100 = 88. A value below 100 means that export prices have risen less than import prices since the base year, so each unit of exports now buys 12% fewer imports than before.Case study
Seen in the real world.
Marrowfield Bakeries is an illustrative, fictional company that imports flour and packaging materials and exports specialist biscuits. For several years, the finance director had treated input costs as stable and set prices once a year.
When the local currency fell 12%, the import price index for its inputs rose 9% within a quarter, and the cost of goods went up by roughly $410,000 on an annual basis. The export price index for biscuits barely moved, because overseas customers paid in foreign currency at fixed prices.
The company introduced quarterly price reviews tied to the import index and began pricing export contracts with an index-linked clause. The illustrative lesson is that import and export prices move for different reasons, and a business exposed on both sides needs to track each one separately.
Watch out
Common mistakes.
- Reading a rise in import prices as proof that the country is importing more, when the index measures price and says nothing about volume.
- Ignoring the exchange rate, even though a currency move can change import prices without any change in the foreign seller's price.
- Assuming the index reflects the price your own business pays, when it is an average across a basket of goods that may differ from your purchases.
Questions
People also ask.
What is the difference between import prices and the consumer price index?
Import prices cover goods bought from abroad at the border, while the consumer price index covers what households pay in shops, and the first tends to feed into the second.
What are the terms of trade?
They are the ratio of export prices to import prices, and a rising ratio means the country gets more imports for each unit of exports.
Do import price indexes include tariffs?
Usually not, because they measure the price before duties and taxes are added at the border.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%