Question
Terms of Trade
Answer :
Word Count : 280
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The terms of trade measures the rate of exchange of one product for another when two countries trade.
David Ricardo's theory of comparative advantage explains that if countries specialise in the production of the good/service in which they have a comparative advantage, then all countries can move outside their PPF and gain from trade. How the gains from trade are distributed depends on the terms of trade.
We calculate the terms of trade as an index number using
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