The formula (index of export prices)/(index of import prices) x 100 is used to measure the____________

Step 1: Analyze the question The formula is (Index of export prices ÷ Index of import prices) × 100. It compares the prices a country receives for its exports with the prices it pays for its imports. We need to name what this ratio measures.

Step 2: Explain the concept The commodity (net barter) terms of trade measure the rate at which a country's exports exchange for its imports:

Terms of Trade = (Index of Export Prices ÷ Index of Import Prices) × 100

• If the value is above 100, the terms of trade have improved (favourable). Export prices have risen relative to import prices, so the country can buy more imports for the same quantity of exports.
• If the value is below 100, the terms of trade have worsened (unfavourable). The country must export more to buy the same quantity of imports.

Step 3: Check each option

• A. Volume of trade between countries: This is about quantities traded, not price indices. Wrong.
• B. Direction of international trade: This shows which countries trade with which, not a price ratio. Wrong.
• C. Commodity terms of trade: This matches the formula exactly. Correct.
• D. Volume of imports: This is a quantity measure and doesn't involve comparing export and import prices. Wrong.

Step 4: Answer The formula measures the commodity terms of trade, which is option C.

Example: Suppose Nigeria's export price index is 120 and its import price index is 100. Terms of trade = (120 ÷ 100) × 100 = 120. This is above 100, so the terms of trade are favourable.

Exam tip: Whenever you see "export prices over import prices," think terms of trade. Prices point to terms of trade, while quantities point to volume of trade. Remember: "Export price over import price, times 100, gives terms of trade."