If a country's Terms of Trade (ToT) improve, what is the

Solution

Solution: The Terms of Trade (ToT) are typically defined as the ratio of a country's export price index to its import price index: ToT= [Export Price Index / Import Price Index ] × 100 · Improvement in ToT: An improvement means the ratio has increased. This can happen if the price of exports rises, or the price of imports falls, or both. · Welfare Effect: When the ToT improves, a country can obtain a greater quantity of imports for any given quantity of exports. This is equivalent to an increase in the country's real income or purchasing power from trade, thus directly improving its welfare. Option C accurately captures this mechanism by stating that the relative price of exports has risen (a cause of improvement), allowing fewer exports to be given up (the beneficial effect on purchasing power).