Terms of trade is favourable when the

Step 1: Analyze the question The question asks when the terms of trade are favourable. This is about the relationship between the prices a country receives for its exports and the prices it pays for its imports.

Step 2: Explain the concept The 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 ratio rises above 100 (or increases over time), the terms of trade are favourable. Each unit of exports can buy more imports.
• If the ratio falls, the terms of trade are unfavourable. The country must export more to buy the same amount of imports.

Step 3: Evaluate each option

• A. Value of visible imports greater than visible exports: This describes an unfavourable balance of trade (a trade deficit). It is not about the terms of trade.
• B. Price of imports greater than that of exports: This means import prices are high relative to export prices, so the terms of trade are unfavourable.
• C. Payments on imports greater than receipts from exports: This describes a deficit in the balance of payments, not the terms of trade.
• D. Price of exports rising faster than that of imports: The export price index is rising relative to the import price index, so the ratio increases. This is favourable.

Step 4: Answer The correct option is D.

Tip: Don't confuse these two ideas:

• Terms of trade is about prices (export prices vs import prices).
• Balance of trade/payments is about values or money flows (receipts vs payments).

If a question mentions prices of exports rising relative to imports, think "favourable terms of trade."