Define terms of trade.

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Terms of trade measures how favorable a country’s export prices are compared with its import prices. It is defined as the ratio of export prices to import prices, usually shown as an index or percentage. This ratio tells how many units of imports the country can buy with a unit of its exports. When export prices rise relative to import prices, the terms of trade improve, meaning more imports can be bought per unit of exports. If export prices fall relative to import prices, the terms of trade deteriorate. For example, if the export price index is 120 and the import price index is 100, the terms of trade are 1.20, allowing 1.2 units of imports per unit of exports. If export prices drop to 90 while imports stay at 100, the terms of trade become 0.90, reducing imports purchasable per unit of exports. The other options don’t define this price ratio that determines how much is importable per unit of export.