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IAI Actuarial Core Principles · Business Economics · Importance of international trade

India's export price index rises from 100 to 110 over a period, while its import price index rises from 100 to 125. Taking the base year terms of trade as 100, what are the new terms of trade and what do they imply for India?

The terms of trade are 110/125 x 100 = 88. Because this is below the base of 100, they have deteriorated: export prices rose less than import prices, so a unit of exports now pays for fewer imported goods.

  1. A88, a deterioration: each unit of exports now buys fewer importsCorrect
  2. B88, an improvement: each unit of exports now buys more imports
  3. C113.6, an improvement: each unit of exports now buys more imports
  4. D113.6, a deterioration: each unit of exports now buys fewer imports
  5. 91, no change in the volume of imports obtainable per unit of exports

Explanation

Terms of trade = (export price index / import price index) x 100 = 110/125 x 100 = 88. A fall below 100 means export prices have risen less than import prices, so each unit of exports buys fewer imports. The 113.6 options invert the ratio.

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