In 2000, the U.S. terms of trade was one. In 2009 the U.S. export price index was 1.15 and the U.S. import price index was 1.18. Which of the following statements is the best interpretation of the change in the U.S. terms of trade between 2000 and 2009?
A) In 2009, the United States had to export 2% more in order to obtain the same amount of imports as in 2000.
B) In 2009, the United States could export 2% less to obtain the same of amount of imports as in 2000.
C) Prices of U.S. exports rose more rapidly than prices of U.S. imports.
D) The U.S. terms of trade improved between 2000 and 2009.

Question

Quizplus · Accepted Answer

The terms of trade are calculated as the ratio of export prices to import prices. In 2000, this ratio was 1, indicating an equal value. By 2009, the export price index was 1.15 and the import price index was 1.18. This means the terms of trade ratio is 1.15/1.18 = 0.97 approximately, indicating that the U.S. had to export more to obtain the same amount of imports, reflecting a 3% increase in the amount needed to export to maintain the same level of imports, not 2% as stated. However, the closest option reflecting a deterioration in terms of trade is option A, despite the slight numerical discrepancy.