Question:
Suppose an economy’s terms of trade index declined from the base year of 100 to 80. Which changes in the export price index and import price index would have caused this?
(1) Export Price Index: +20; Import Price Index: 0
(2) Export Price Index: -40; Import Price Index: +20
(3) Export Price Index: -10; Import Price Index: +20
(4) Export Price Index: -12; Import Price Index: +10
(5) Export Price Index: -4; Import Price Index: -20
Correct Answer:
(4)
Answer Explanation:
Terms of Trade (TOT) = (Export Price Index / Import Price Index) x 100. Assuming a base of 100 for both, check option 4: Export Price Index becomes 88 (100 – 12) and Import Price Index becomes 110 (100 + 10). TOT = (88 / 110) x 100 = 0.8 x 100 = 80. This mathematically perfectly matches the decline.
Topic: International Trade Year: 2022
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