CA Foundation · Business Economics · International Trade
A country's export price index rises from 100 to 120 while its import price index rises from 100 to 150 over a period. What happens to its net barter terms of trade (taking the base as 100)?
The net barter terms of trade fall to 80, a deterioration. It is computed as export price index divided by import price index times 100, that is 120 divided by 150 times 100. A value below the base of 100 means exports now buy fewer imports.
- AThey improve to 125
- BThey deteriorate to 80Correct
- CThey remain unchanged at 100
- DThey improve to 130
Explanation
Net barter terms of trade = (export price index / import price index) x 100 = (120/150) x 100 = 80. Since this is below 100, the terms of trade have deteriorated. Option 125 results from inverting the ratio (150/120), which is the wrong way round.
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