if the price of exports decreases relative to the price of imports, the terms of trade have [...]
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Open it if the price of exports decreases relative to the price of imports, the terms of trade have deteriorated because the country will be able to purchase fewer imports with the same amount of exports.
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2.1. Basic Terminology e to a South African diamond exporter, Britain would classify the cost of the insurance as an export of services to South Africa. Other examples of services exported/imported include engineering, consulting, and medical services.
<span>The terms of trade are defined as the ratio of the price of exports to the price of imports, representing those prices by export and import price indices, respectively. The terms of trade capture the relative cost of imports in terms of exports. If the prices of exports increase relative to the prices of imports, the terms of trade have improved because the country will be able to purchase more imports with the same amount of exports.2 For example, when oil prices increased during 2007–2008, major oil exporting countries experienced an improvement in their terms of trade because they had to export less oil in order to purchase the same amount of imported goods. In contrast, if the price of exports decreases relative to the price of imports, the terms of trade have deteriorated because the country will be able to purchase fewer imports with the same amount of exports. Because each country exports and imports a large number of goods and services, the terms of trade of a country are usually measured as an index number (normalized to 100 in some base year) that represents a ratio of the average price of exported goods and services to the average price of imported goods and services. Exhibit 1shows the terms of trade reported in Salvatore (2010). A value over (under) 100 indicates that the country, or group of countries, experienced better (worse) terms of trade rel
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