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.
