Question:
A country’s terms of trade increased from the base year value of 100 to 130 in the following year. What changes in export prices and import prices would have caused this?
(1) Exp Dec 30% / Imp Inc 10%
(2) Exp Dec 20% / Imp Dec 10%
(3) Exp Inc 30% / Imp Unchanged
(4) Exp Inc 10% / Imp Dec 20%
(5) Exp Unchanged / Imp Inc 30%
Correct Answer:
(3)
Answer Explanation:
The Terms of Trade (TOT) index formula is: (Export Price Index / Import Price Index) x 100. If the base year is 100, an increase in export prices by 30% makes the Export Index 130. If import prices are unchanged, the Import Index is 100. Therefore, (130 / 100) x 100 = 130, perfectly matching the scenario.
Topic: International Trade Year: 2018
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