CA Foundation · Business Economics · International Trade
Which of the following is generally true when a country's terms of trade improve?
When terms of trade improve, a given quantity of exports buys more imports. This happens because export prices have risen relative to import prices. It does not automatically produce a balance of payments surplus, since trade volumes and capital flows also affect the overall position.
- AA given quantity of exports can purchase a larger quantity of importsCorrect
- BThe country must export more units to buy the same imports
- CImport prices have risen relative to export prices
- DThe country's balance of payments necessarily moves into surplus
Explanation
An improvement means export prices rise relative to import prices, so each unit of exports buys more imports. The second and third options describe a deterioration. Terms of trade alone do not determine the balance of payments, since volumes and other flows also matter.
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