Improving Terms of Trade Reduce Import Costs

Steps:

• Terms of trade index = (export price index / import price index) × 100; rising index indicates exports gaining value relative to imports.
• Index rises from 100 to 112 over three years, showing improving terms of trade.
• Improving terms mean imports become cheaper in export terms, lowering input costs for domestic producers.
• Lower input costs reduce upward pressure on prices from production side.

Why A is correct:

• Cost-push inflation arises from rising production costs like imported raw materials; improving terms of trade decrease relative import prices, directly easing this pressure per economic definitions.

Why the others are wrong:

• B: Living standards rise with real GDP per capita, not directly from terms of trade, which may not boost consumption if export volumes fall.
• C: Budget surplus depends on tax revenues and spending, unrelated to terms of trade changes.
• D: Export volume is driven by global demand and competitiveness, not the price ratio in terms of trade.

Final answer: A