Answer to Question #292809 in Economics for Hafsa

Question

Suppose that the terms of trade of a nation improved from 100 to 110 over a given period of time.

(a) By how much did the terms of trade of its trade partner deteriorate? (b) In what sense can this be said to be unfavorable to the trade partner? Does this mean that the welfare of the trade partner has definitely declined?

Answer 1

(a) The terms of trade of its trade partner deteriorate by 110 - 100 = 10 units.

(b) If exports exceeds imports, a country is said to have a favourable balance of trade (trade superavit); if not, the trade balance is unfavourable (trade deficit). In view of the increased pressure of demand for such products to push ahead the process of expansion, the imports of such products have to be made at relatively higher prices. The higher import prices relative to export prices make the terms of trade unfavourable for these countries.

This means that the welfare of the trade partner has definitely declined.