Terms of Trade Improvement

Steps:

• Terms of trade is the ratio of a country's export prices to its import prices.
• A rise in export prices relative to import prices increases this ratio.
• An increase in the ratio signals an improvement in terms of trade.
• This benefits the country by allowing more imports per unit of exports.

Why B is correct:

• Terms of trade is defined as (export price index / import price index) × 100; a rise in export prices relative to imports raises the ratio, confirming improvement.

Why the others are wrong:

• A: Improves trade balance by increasing export value, not causing a deficit.
• C: Affects purchasing power abroad but does not directly cause domestic inflation.
• D: Exchange rate depends on supply-demand factors, not solely price ratios.

Final answer: B