Unfavourable terms of trade spur efficiency via competition

Steps:

• Terms of trade = export prices / import prices; unfavourable shift means ratio falls.
• Exports buy fewer imports, raising relative cost of foreign goods.
• Domestic firms face stiffer import competition and export pressure.
• This weeds out low-productivity firms, boosting economy-wide efficiency.

Why D is correct:

• Per Schumpeterian creative destruction, declining terms of trade erode profits for inefficient exporters/importers, forcing their exit and reallocating resources to productive uses.

Why the others are wrong:

• A: Reduces import purchasing power, limiting domestic goods availability.
• B: Makes imports costlier relative to exports, not domestic goods pricier.
• C: Lowers export prices relatively, enhancing—not reducing—international competitiveness.

Final answer: D