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Comparative_Advantage__Lesson_6_

Comparative_Advantage__Lesson_6_ - Terms of Trade and...

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1 Lesson 6 1 Definition: A country’s terms of trade are defined as the price of its imported goods relative to the price of its exported goods. Terms of Trade and Economic Welfare Lesson 6 2 For example, if X is the import good and Y is the export good for some country, that country’s terms of trade is then Y X P P Definition: An improvement in the terms of trade is defined as a decrease in the price of a country’s imports relative to its exports. Equivalently, an improvement in the terms of trade is defined as an increase in the price of a country’s exports relative to its imports. Lesson 6 3 A deterioration in a country’s terms of trade is the opposite of an improvement: a country’s terms of trade deteriorate when its imports become more expensive relative to its exports. An improvement in its terms of trade increases a country’s welfare, a deterioration in its terms of trade reduces its welfare.
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