Question

28.           A terms-of-trade index that equals 150 indicates that compared to the base year of 100,

a.             it requires a greater output of domestic goods to obtain the same amount of foreign goods.

b.             it requires a lesser amount of domestic goods to obtain the same amount of foreign goods.

c.             the price of exports has risen from $100 to $150.

d.             the price of imports has risen from $100 to $150.

Answer 1

Option B.

• A terms of trade index measures the rate at which the price's of exports can be used to pay off the imports.
• It is actually the ratio of export prices to import prices as it measures how much imports a nation can purchase using the profits from exports.
• When terms of trade index is compared with the base year, we can easily measure how much domestic goods are required to purchase foreign goods.
• Hence if the value of TOT index is 150 which is greater than the base year index of 100, then it requires a lesser amount of domestic goods to obtain the same amount of foreign goods.