Other things being equal, a rise in a country's terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?
What will be an ideal response?
Let us assume that the terms of trade (or technically the net commodity terms of trade) improve, thus the relative price of a country's exports increase. This would, logically, lead to a shift away by world consumers to substitute goods. If the demand for a country's exports is elastic, the quantity decrease would be proportionally larger than the per unit price increase. This term of trade effect would actually lower the country's real income and economic welfare.
You might also like to view...
The Herfindahl-Hirschman (HH) Index is used to
A) measure the degree of nonprice competition. B) measure the degree of market concentration in an industry. C) measure the extent of price leadership. D) None of the above
A decrease in the interest rate, other things constant, will: a. shift the demand for loanable funds curve to the right. b. shift the demand for loanable funds curve to the left. c. increase the quantity of loanable funds demanded. d. increase the quantity of loanable funds supplied
e. shift the supply of loanable funds curve to the right.