In a two-nation world,if Nation A's export prices increase relative to their import prices,which of the following will occur?
A)Terms of trade improve for both nations
B)Terms of trade worsen for Nation A and improve for their trade partner
C)Terms of trade improve for Nation A and worsen for their trade partner
D)Terms of trade worsen for both nations

Question

Quizplus · Accepted Answer

When Nation A's export prices increase relative to their import prices, it means that Nation A's terms of trade have improved, as they are able to purchase more imports with the same amount of exports. However, this also means that their trade partner's terms of trade have worsened, as they are now receiving fewer imports for the same amount of exports. Therefore, the correct answer is that the terms of trade will improve for Nation A and worsen for their trade partner.

In a Two-Nation World,if Nation A's Export Prices Increase Relative