Terms of trade practice problems
A worsening terms of trade indicates that a country has to export more to purchase a given quantity of imports. According to the Prebisch-Singer hypothesis, this fate has befallen many developing countries given the general decline in commodity prices in relation to the price of manufactured goods. However, such gain from specialisation and exchange depends on the terms of trade (TOT). It refers to the quantity of imports that exports buy. It is measured by the ratio of export price to import price. It is the ratio at which a country can export or sell domestic goods for imported goods.