Terms of Trade Index Measures Export vs. Import Prices

Steps:

• Define terms of trade: Ratio showing how much imports can be bought with exports.
• Recall formula: (Export price index / Import price index) × 100.
• Compare options: Identify which captures the export price component normalized to a base.
• Confirm A: It normalizes export prices to 100, serving as the numerator base in the index.

Why A is correct:

• Terms of trade index formula uses export price index as the key numerator, divided by 100 to express it relative to a base year of 100.

Why the others are wrong:

• B: Focuses only on import prices, ignoring the export-import ratio.
• C: Uses total export value, not price indices needed for trade terms.
• D: Measures trade balance, not the price-based terms of trade.

Final answer: A