Suppose a large country experiences economic growth which results in an increased willingness to trade. The country's terms of trade will _____ because the increase in demand for imports will cause the price of its exports to _____ relative to the price that it has to pay for its imports.

Question

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An increase in demand for imports means that the country needs to pay more for those imports. As a result, its terms of trade will worsen because it will need to give up more of its exports to pay for the same amount of imports. The price of exports will fall as demand may not keep up with the increased supply due to the economic growth.

Suppose a Large Country Experiences Economic Growth Which Results in an Increased