Let Px represent the price of exports and Pm the price of imports. Then the terms of trade (TOT) are said to be favourable if

  • A \(\frac{Px}{Pm}\)
  • B \(\frac{Px}{Pm}\)=1
  • C \(\frac{Px}{Pm}\)>1
  • D \(\frac{Px}{Pm}\)+1
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The correct answer is C. \(\frac{Px}{Pm}\)>1

The terms of trade (TOT) represent the ratio of export prices (Px) to import prices (Pm). When this ratio increases, it means that the country receives more value for its exports relative to the cost of its imports, which is considered favourable for the country.

Therefore, the terms of trade (TOT) are said to be favourable if \(\frac{Px}{Pm}\) > 1.

This indicates that the price of exports (Px) is greater than the price of imports (Pm), implying a positive balance of trade.

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