If export prices rise relative to import prices, what happens to a country's terms of trade?

If export prices rise relative to import prices, what happens to a country's terms of trade?

• A. They worsen.
• B. They are unaffected by price movements.
• C. They improve.
• D. They become unpredictable.

Answer: (C)

The key idea is the terms of trade, which is the ratio of export prices to import prices. When export prices rise relative to import prices, that ratio increases. In practical terms, the country can buy more imports for the same amount of exports, or need fewer exports to pay for the same amount of imports. This means the terms of trade have improved. The other outcomes—worsening, no change, or becoming unpredictable—don’t align with a rising export-to-import price ratio.

The key idea is the terms of trade, which is the ratio of export prices to import prices. When export prices rise relative to import prices, that ratio increases. In practical terms, the country can buy more imports for the same amount of exports, or need fewer exports to pay for the same amount of imports. This means the terms of trade have improved. The other outcomes—worsening, no change, or becoming unpredictable—don’t align with a rising export-to-import price ratio.