Terms of trade fall from declining export prices

Steps:

• Terms of trade (ToT) = (export price index / import price index) × 100; a decline indicates export prices fell relative to import prices.
• Arabia, as a major oil exporter, relies on oil for export revenue, so oil price changes directly impact the export price index.
• A drop in oil export prices lowers the numerator in the ToT formula, reducing the overall ratio.
• Other factors like quantities or currency do not directly alter price indices.

Why C is correct:

• ToT formula shows that a fall in export prices (numerator) directly reduces the ratio, assuming stable import prices.

Why the others are wrong:

• A: Export quantities affect volume but not price indices in ToT calculation.
• B: Production levels influence supply but do not directly change export prices.
• D: Currency appreciation raises export prices in foreign currency, improving ToT.

Final answer: C