A country has favourable terms of trade when the prices of her

Step 1: Analyze the question The question asks when a country's terms of trade are favourable.

Step 2: The concept Terms of trade (TOT) show the rate at which a country's exports exchange for its imports. The commodity (net barter) terms of trade formula is:

TOT = (Index of export prices ÷ Index of import prices) × 100

• If TOT rises, the terms of trade are favourable. Each unit of exports buys more imports.
• If TOT falls, the terms of trade are unfavourable.

Step 3: Apply it to the options

• A. Exports rise relative to the price of imports. The numerator increases faster than the denominator, so TOT rises. This is favourable. ✔
• B. Exports fall relative to the price of imports. TOT falls, so this is unfavourable. ✘
• C. Imports rise faster than the prices of imports. This is illogical because it compares imports with themselves. Even if it meant import prices rising, that would be unfavourable. ✘
• D. Imports and exports move in the same direction. If both move by the same proportion, TOT is unchanged. This is not clearly favourable. ✘

Step 4: Example Suppose Nigeria's export price index (crude oil) rises from 100 to 120, while the import price index stays at 100. TOT = (120 ÷ 100) × 100 = 120. Nigeria can now buy 20% more imports for the same quantity of exports, which is favourable.

**Answer: A.

Exam tip: Remember "Export price up = TOT up = Favourable". The export price is on top of the fraction, so anything that raises exports' prices relative to imports' prices improves the terms of trade.