Terms of Trade Rise from Currency Appreciation

Steps:

• Terms of trade index = (export price index / import price index) × 100.
• Index rising from 100 to 104 indicates export prices increased relative to import prices.
• Currency appreciation lowers import prices in domestic currency.
• This widens the export-to-import price ratio, boosting the index.

Why C is correct:

• Appreciation reduces import prices in domestic currency (per the formula), improving terms of trade without altering export prices directly.

Why the others are wrong:

• A: Falling export prices with unchanged imports decreases the index ratio.
• B: Export revenue fall affects quantity or demand, not price indices.
• D: Higher import value likely raises import prices, worsening the index.

Final answer: C