Terms of Trade Improvement via Price Ratios

Steps:

• Define terms of trade as the ratio of export prices to import prices (TOT = Px / Pm * 100).
• Improvement occurs when TOT rises, meaning export prices increase relative to import prices or import prices fall relative to export prices.
• Evaluate options by checking if they raise the TOT ratio.
• Select the option that directly causes TOT to increase without volume or value distortions.

Why B is correct:

• A fall in import prices with unchanged export prices increases the TOT ratio, as per the formula TOT = Px / Pm * 100.

Why the others are wrong:

• A: Falling export prices more than imports decreases the TOT ratio.
• C: Value changes reflect quantities traded, not pure price terms of trade.
• D: Volume changes ignore prices, focusing on quantities rather than trade terms.

Final answer: B