Assume that, for a certain country in a given year, the index of import prices stands at 102, the index of…

Analyze the question: We are asked for the terms of trade, given an export price index of 106 and an import price index of 102.

Concept: The commodity (net barter) terms of trade measure how many units of imports a country can obtain for one unit of exports:

Terms of trade = (Index of export prices ÷ Index of import prices) × 100

A value above 100 means the terms of trade have improved (exports are earning more imports). A value below 100 means they have worsened.

Solution:

Terms of trade = (106 ÷ 102) × 100

= 1.0392 × 100

= 103.92

≈ 104 (to the nearest whole number)

Checking the options:

• A. 208 is the sum of 106 and 102, which is not a ratio.
• B. 104 matches our calculation.
• C. 54 has no basis in the formula.
• D. 4 is the difference (106 − 102), which is not the formula.

Interpretation: Since 104 is greater than 100, the country's terms of trade are favourable. Export prices have risen more than import prices.

Exam tip: Remember "X over M": the Xport index goes on top and the Mport index goes at the bottom, then multiply by 100. If you flip them, you get 96, which is wrong. Also, the terms of trade is a ratio, so never add or subtract the indices.