Normalized Difference Vegetation Index (NDVI) is defined on similar lines

NDVI = (NIR - VIS) / (NIR + VIS)

See more here

http://en.wikipedia.org/wiki/Normalized_Difference_Vegetation_Index

Not sure if this is a really good way to model / measure trade flows -- there are lots of indices for balance of trade ... I think you intended to compute it for ONE economy, but I think we can see the properties better when we model a set of interacting regions as a system. Here is a small 5 x 5 example (see attached EXCEL sheet)

The net flow (your numerator) is positive for a net exporter, and negative for a net importer; the sum of the net flows (across all the regions is zero).

Your denominator depends on the size of the total flows for this commodity; your index will be large positive for a given region when the net flows for a region are large compared to the volume of interactions (see region 5)

This by the way is set up for ONE commodity across 5 regional trading partners;

The numbers are completely arbitrary and made up simply for illustration, and it could easily be made more general.

Thank you for your answers and your efforts. In the meantime, I have found in the literature the Net Export Indes (NEI). The net export index (NEI) is the country's or secto's exports less its imports divided by the total value of trade (Banterle and Carraresi, 2007).

Thanks again.

I'd say it depends if your objective is trade analysis or macroeconomics (balance of payments).

 The ratio (X+M)/GDP is often presented as a trade openness indicator, which is wrong from a trade policy perspective. This indicator is actually derived from the macroeconomics of small open economies and describes the relative importance of external shocks (id est, the gap between actual macroeconomics and the old textbook case of a closed economy).

 It is not a good indicator of trade policy: Economic size (GDP) is more important in defining its value than trade policy (an economy with low tariffs like the USA will have a lower ratio than a high tariff small economy).

 (X-M)/GDP is also a macro indicator, derived from the demand side GDP identity:

GDP = I + C + X - M

 From a macro perspective, this trade deficit is part of the current account deficit and it is important to know how it is financed and it is transitory or structural. Because of balance of payments identity, any inflow of capital, not compensated by an increase in international reserves, will have to be balanced by a current account deficit. If the additional imports correspond to investment goods, the deficit is expected to be followed by increased exports. If the additional capital is used to finance the import of consumption goods, well, here you may have an issue is the hard currency flows are volatile. Note that many poor developing countries receive expatriated workers remittances that are used to sustain household consumption and imports of consumer goods. A policy issue is to divert some of these remittances to finance productive investment instead of consumption, but it is easier said than done and should be put into perspective as increasing access to food, housing and health remain priorities for poor households.

 M/X (import coverage by exports) can be interesting for sectoral studies, in particular linked to food security. I would not use it for trade analysis, as countries tend to specialize on some production according to their comparative/competitive advantages and import products for which they are not competitive. And contemporaneous trade theory (the new "new" trade theory) puts a lot of emphasis on trade in varieties: countries with different comparative advantages may nevertheless trade similar products, but with different characteristics (e.g., France will export small cars to Germany and import luxury berlins: the net trade may appear balanced but industrial specialization is different).

 Worst; trade along global value chains indicates that, to be able to export, you need to import. So a low M/X may signal a poor integration into the global economy.

So, the final answer is that "it depends". Cheers.

Hubert

Hubert, thanks for the detailed and useful explanations.

Hello!

1. The normalized trade balance

Z = (X – M) / (X + M) , with values between -1 and +1

X = exports

M = imports

It is considered a net trade performance indicator.

2. 'Terms of Trade - TOT'

The value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports).

(Investopedia definitions)

May I add to Ilulia's comments on terms of trade?

She refers in her comments to the balance of payments / national accounts perspective, when the evolution of unit prices of exports diverge from unit prices of imports (when comparing to baseline prices used for constant price accounting). If export prices increase more/less  rapidly than import prices, there is a gain/loss in ToT (higher/lower purchasing power per unit of exports) compared to the benchmark year. This is the definition most commonly used and it is often referred to Barters Terms of Trade. By definition, the ToT are 0 for the benchmark year (whose prices are used to base national accounts in constant price).

Trade economists have a different approach to ToT which is based on micro-economics: If I am a large importer for a specific product and I raise tariffs on those imports, I may force a drop in the internaitonal price of this product because of lower demand from my side. As an importer, I gain from lower international price and higher tax revenues (producer, unless internaitonal prices are significnatly reduced to compensate the tariff; and government surplus) and lose on consumers' welfare (higher prices) unless the international prices are reduced in full proportion of the tariff.

The size of the price effect in the microeconomists ' perspective is clearly linked to some kind of dominant market position and are pretty difficult to measure in practice (unless I am mistaken, there is even a debate on their practical importance in today's world economy, at least from an import's perspective). Statisticians' Barter Terms of Trade are purely accounting results: they can be computed for any country size.

Cheers,

Hubert

Iulia and Hubert, thanks for the useful explanations.