Currency Depreciation Worsens Terms of Trade

Steps:

• Terms of trade measure export prices relative to import prices (TOT = Px / Pm).
• Currency depreciation raises import prices in domestic currency while export prices remain stable in foreign currency terms.
• Higher Pm relative to Px decreases the TOT ratio.
• Thus, the country gets fewer exports per import, worsening terms of trade.

Why C is correct:

• By definition, TOT worsens when import prices rise relative to export prices due to depreciation increasing the domestic cost of imports.

Why the others are wrong:

• A: Depreciation does not improve TOT; it raises import costs, not export values.
• B: TOT changes because import prices increase in domestic terms.
• D: Worsening occurs directly from higher import prices, not conditionally on inflation.

Final answer: C