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CA Foundation · Business Economics · International Trade

In the base year, a country's export price index and import price index were both 100. In the current year, the export price index is 120 and the import price index is 150. If the country exported 500 units in the base year and its export volume stays the same, what is the net barter terms of trade, and what is its effect?

The net barter terms of trade are 80, which is a worsening. It equals the export index of 120 divided by the import index of 150, times 100. Import prices rose faster than export prices, so the same exports buy fewer imports than before.

  1. A80; worsening, so the same exports buy fewer importsCorrect
  2. B125; improvement, so the same exports buy more imports
  3. C80; improvement, since export prices have risen
  4. D125; worsening, since import prices have risen

Explanation

Net barter terms of trade = (120/150) x 100 = 80. This is below 100, so the terms of trade have worsened: the same quantity of exports now purchases only 80% of the imports bought earlier. Rising export prices alone do not mean improvement because import prices rose more. The 125 figure inverts the ratio.

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