Terms of Trade Formula

Steps:

• Define terms of trade as the ratio measuring how much imports can be bought with a unit of exports.
• Identify it uses price indices, not total values, to isolate price changes.
• Recall the standard formula: export price index divided by import price index.
• Match to option A, which expresses average export prices over average import prices.

Why A is correct:

• This is the standard economic formula for the terms of trade index, reflecting the purchasing power of exports relative to imports.

Why the others are wrong:

• B: This is the reciprocal, measuring import prices relative to exports, not the conventional terms of trade.
• C: This calculates the export-import value ratio, akin to balance of trade coverage, not price-based terms.
• D: This is the inverse value ratio, indicating import dependence, unrelated to price terms.

Final answer: A