Terms of Trade Worsen from Unequal Price Increases

Steps:

• Define terms of trade as the ratio of export prices to import prices.
• Note export prices rose 5%, so export index becomes 1.05 times original.
• Note import prices rose 10%, so import index becomes 1.10 times original.
• Calculate new ratio: (1.05 / 1.10) < 1, showing deterioration.

Why D is correct:

• Terms of trade worsen when import prices rise faster than export prices, per the formula (export price index / import price index).

Why the others are wrong:

• A: Balance of trade depends on export/import volumes, not just prices; no volume data given.
• B: Balance could improve if export volumes surge, despite price changes; insufficient info.
• C: Terms improve only if export prices rise more than import prices, which did not occur.

Final answer: D