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

Which of the following would, other things equal, most directly lead to an improvement in a country's terms of trade?

A rise in world demand for the country's main exports improves its terms of trade, because it raises export prices relative to import prices. Volume changes at fixed prices do not alter the ratio, and falling export prices or dearer imports would worsen it.

  1. AA rise in world demand for its main exports, raising their prices relative to import pricesCorrect
  2. BA fall in world prices of its exports with import prices unchanged
  3. CA rise in world oil prices for a net oil importer
  4. DA rise in its volume of exports at unchanged prices
  5. A fall in its volume of imports at unchanged prices

Explanation

Terms of trade depend on relative prices of exports and imports, not volumes. Higher world demand raises export prices relative to import prices, improving the ratio. A fall in export prices or a rise in import prices worsens it; volume changes at unchanged prices leave it unchanged.

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