Terms of Trade
Terms of trade measure the relative prices of exports and imports. Terms of trade = (Index of Export Prices / Index of Import Prices) × 100. Improving terms of trade means exports have become relatively more valuable.
Real World
When global oil prices surged in 2021–22, oil-importing countries like Japan saw their terms of trade deteriorate sharply — they had to export far more cars and electronics to pay for the same volume of energy imports.
Exam Focus
State whether terms of trade are 'improving' or 'deteriorating' and immediately explain the welfare implication — examiners reward precise directional analysis.
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