Explain two reasons for an improvement in a country’s terms of trade
Demands of the question:
20 minutes
No evaluation
Definition of terms of trade: (index of export prices/index of import prices)
An example of improvement in terms of trade can be when export prices rise relative to import prices
When there is an improvement in terms of trade, more imports can be bought with same quantity of exports
The Terms of Trade can increase when there is:
a relative rise in the domestic inflation rate. This will make domestic goods more expensive relative to imported goods. As a result, export prices will rise relative to imported prices and terms of trade would improve
a rise in the demand for domestic exports. This will increase their price and, ultimately, the terms of trade would improve.
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