Terms of Trade as Export-to-Import Price Ratio

Steps:

• Recall that terms of trade (ToT) assess a country's export-import price relationship for trade benefits.
• Identify the standard formula: ToT = (Index of export prices / Index of import prices) × 100.
• Compare choices to this formula, focusing on price averages rather than volumes or values.
• Eliminate options using volumes or total values, as they ignore relative prices.

Why B is correct:

• It matches the economic definition: ToT is the ratio of average export prices to average import prices, showing purchasing power from exports.

Why the others are wrong:

• A: Measures trade volume balance, not prices; this is trade balance in quantities.
• C: Reflects overall trade value ratio, ignoring price changes; this is the export-import value ratio.
• D: Compares export and import volumes, not prices; this is a quantity ratio unrelated to trade terms.

Final answer: B