When the terms of trade risesGroup of answer choicesThe relative prices of export goods decreaseConsumers who prefer foreign goods are better off.The price index of import goods increasesThe country is unambiguously worse off
Question
When the terms of trade risesGroup of answer choicesThe relative prices of export goods decreaseConsumers who prefer foreign goods are better off.The price index of import goods increasesThe country is unambiguously worse off
Solution
The terms of trade is the ratio of an index of a country's export prices to an index of its import prices. If the terms of trade rises, it means that the prices of the country's exports have risen relative to the prices of its imports.
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The relative prices of export goods decrease: This is incorrect. When the terms of trade rises, it means that the prices of the country's exports have increased relative to the prices of its imports.
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Consumers who prefer foreign goods are better off: This is incorrect. When the terms of trade rises, it means that the country's exports have become more expensive relative to its imports. This would make foreign goods more expensive for consumers, not less.
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The price index of import goods increases: This is incorrect. A rise in the terms of trade means that the prices of the country's exports have increased relative to the prices of its imports. This does not necessarily mean that the price index of import goods has increased.
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The country is unambiguously worse off: This is not necessarily true. A rise in the terms of trade means that the country can now buy more imports for each unit of exports. However, whether this is beneficial or not depends on other factors, such as the elasticity of demand for exports and imports, the country's production possibilities, and the preferences of consumers.
Similar Questions
4) Suppose that a country experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to leave the country's terms of trade unchanged.D) this will tend to worsen the terms of trade for the country's trading partner.E) this will increase the price of cloth relative to the imported good.
If a good is imported into (large) country H from country F, then the imposition of a tariff incountry HA) raises the price of the good in both countries (the "Law of One Price").B) raises the price in country H and cannot affect its price in country F.C) lowers the price of the good in both countries.D) lowers the price of the good in H and could raise it in F.E) raises the price of the good in H and lowers it in F.
A country that imposes a tariff on imported goods is most likely to experience which benefit?A.Working conditions for domestic workers will improve relative to other countries.B.A wider variety of imported products will become available to consumers.C.The country will begin producing goods more efficiently than other countries.D.Goods produced by domestic companies will be cheaper than competing imports.
2. Assume Ricardian world. With no trade, if a country consumes two goods, it implies thatA) the price of two goods are the same.B) the relative price of one good is the same as the opportunity costs of that good.C) the relative price of one good is the same as the opportunity costs of the other good.D) A good which is consumed more is cheaper than the other good.
An appreciation in the exchange rate makes a country's exports more expensive.Question 10Answera.Trueb.False
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