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what are terms of trade? what is meant by an improvement in the terms of trade?...

what are terms of trade? what is meant by an improvement in the terms of trade? what do changes in the terms of trade imply of the changes in economic welfare when trade restrictions are relaxed? discuss

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Answer #1

Terms of trade is the ratio of export price index and import price index.

An improvement in term of trade refers to the situation when a country's exports or value of exports in terms of value of imports increases.

Changes in terms of trade affect economic welfare. When there is an improvement in terms of trade, country's GDP rises because value of imports is lower than value of exports. When terms of trade worsens value is imports is greater than value of exports which leads to decrease in gdp and hence economic welfare.

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