An improvement in a country's terms of trade occurs when which happens?

An improvement in a country's terms of trade occurs when which happens?

• A. Export prices rise relative to import prices.
• B. Import prices rise faster than exports.
• C. Both export and import prices fall by the same amount.
• D. Domestic currency appreciates without affecting trade.

Answer: (A)

Terms of trade improve when the price of a country's exports rises relative to the price of its imports. This means the country can buy more imports with the revenue from its exports, or get the same amount of imports for fewer exports. For example, if export prices go up while import prices stay the same, the ratio of export prices to import prices increases, signaling an improvement. If import prices rise faster than export prices, the country must export more to pay for the same level of imports, so the terms of trade worsen. If both export and import prices fall by the same amount, the ratio stays the same, so there’s no improvement. A domestic currency appreciating on its own doesn’t guarantee better terms of trade—the effect depends on how export and import prices move relative to each other.

Terms of trade improve when the price of a country's exports rises relative to the price of its imports. This means the country can buy more imports with the revenue from its exports, or get the same amount of imports for fewer exports. For example, if export prices go up while import prices stay the same, the ratio of export prices to import prices increases, signaling an improvement.

If import prices rise faster than export prices, the country must export more to pay for the same level of imports, so the terms of trade worsen. If both export and import prices fall by the same amount, the ratio stays the same, so there’s no improvement. A domestic currency appreciating on its own doesn’t guarantee better terms of trade—the effect depends on how export and import prices move relative to each other.