The terms of trade is given by the prices:
Options:
| a. Paid for all goods exported by the home country. b. Received for all goods exported by the home country. c. Received for exports and paid for imports. d. Of primary products as opposed to manufactured products. |
The Correct Answer Is:
c. Received for exports and paid for imports.
Correct Answer Explanation:
The correct answer is c. “Received for exports and paid for imports” because it accurately defines the terms of trade. Terms of trade refer to the ratio of export prices to import prices, and it’s an essential economic concept for understanding a country’s international trade relationships. Let’s delve into the explanation in detail:
c. Received for exports and paid for imports:
The terms of trade represent the relative prices of a country’s exports and imports. In this context, “received for exports” means the prices received by the home country for the goods it exports to other nations. This is crucial because it determines the revenue earned from international trade.
At the same time, “paid for imports” refers to the prices that the home country has to pay for the goods and services it imports from other countries. The terms of trade, thus, take into account both sides of the trade equation: what the country receives for its exports and what it pays for its imports.
The ratio between these two values provides a clear picture of whether a country’s trade is favorable or unfavorable. If the ratio is greater than 1, it indicates that a country can buy more imports with a given quantity of exports, which is a positive situation.
If the ratio is less than 1, it suggests that a country’s purchasing power for imports is decreasing relative to its exports, which can be problematic for the economy.
Now, let’s explain why the other options are not correct:
a. Paid for all goods exported by the home country:
This option is incorrect because it only considers the payment for exported goods. It oversimplifies the concept of terms of trade by focusing solely on the revenue generated from exports. However, this narrow perspective fails to take into account the crucial aspect of import prices.
In international trade, it is imperative to consider both sides of the trade equation – what a country receives for its exports and what it pays for its imports. Ignoring the prices paid for imported goods can lead to an incomplete and potentially misleading assessment of a country’s trade performance.
b. Received for all goods exported by the home country:
Similarly, this option is incorrect because it exclusively emphasizes the revenue received from exported goods. While this is an essential aspect of a country’s trade, it is not the complete picture. The terms of trade encompass both export and import prices.
Focusing solely on export earnings neglects the prices a country must pay for the goods and services it imports. Without considering the costs of imports, it is impossible to make a comprehensive evaluation of a nation’s trade relationships and their impact on its overall economic well-being.
d. Of primary products as opposed to manufactured products:
This option is incorrect because it does not pertain to the concept of terms of trade. Instead, it refers to a distinction between primary products (raw materials, agricultural goods) and manufactured products (goods that have undergone further processing or manufacturing).
While this distinction is relevant in the context of international trade, it is a separate concept from the terms of trade. The terms of trade focus on the relative prices of exports and imports, regardless of the nature of the goods being traded.
It is possible for both primary and manufactured products to be involved in a country’s trade, and the terms of trade analysis applies to both.
In summary, understanding the terms of trade requires considering both the prices received for exports and the prices paid for imports. Options a, b, and d are incorrect because they either ignore the prices paid for imports, focus on only one aspect of trade, or address a different concept altogether.
It is essential to grasp the holistic nature of the terms of trade in order to make accurate assessments of a country’s international trade relationships and their economic implications.
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