Given Px as the export price index, Pm as the import price index, Qx as the export quantity index, and Qm as the import quantity index, developing nations often claim that their commodity terms of trade have deteriorated over time. Which ratio is indicated to have decreased in this context?

Show Answers

The ratio of export prices to import prices (Px divided by Pm)The ratio of import prices to export prices (Pm divided by Px)The product of import price-to-export price ratio and import quantity index ((Pm/Px) × Qm)The product of export price-to-import price ratio and export quantity index ((Px/Pm) × Qx)None of the above

Explanation

The terms of trade is represented by the ratio of export prices to import prices (Px/Pm). A decline in this ratio indicates that the prices of exports relative to imports have fallen, which is commonly observed in developing countries over the long term.