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CB2 - Sept 2008, qus26

B

Bharti Singla

Senior Member
24 Country A exports Good X and imports Good Y from Country B. The price of Good X rises by 20 per cent and the price of Good Y falls by 40 per cent. Which of thefollowing statements is correct about Country A’s terms of trade?
A It has improved by 100 per cent.
B It has improved by 60 per cent.
C It has deteriorated by 100 per cent.
D It has deteriorated by 60 per cent.

May I know why the answer is A?
 
This is how I would see it -

Imagine both good x and good y start out at 100.
Good x increases by 20%, so it's at 120.
Good y decreases by 20%, so it's at 60.

Country A is exporting good x, so getting a the higher price of 120 for goods it sells. It is importing the cheaper good y at 60. So the improvement in terms of trade is 100%. Hope that makes sense, also anyone else feel free to add or correct to my explanation.
 
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