Question

France exports wine and imports cars and Germany exports cars and imports wine. If the price of wine doubles and the price of cars increases by 10%:

(A) The terms of trade have improved both for France and for Germany.

(B) The terms of trade have deteriorated both for France and for Germany.

(C) The terms of trade have deteriorated for France and improved for Germany.

(D) The terms of trade have improved for France and deteriorated for Germany

Answer 1

The terms of trade have improved for France and deteriorated for Germany.

Step-by-step explanation:

In this scenario, the terms of trade have improved for France and deteriorated for Germany.

When the price of wine doubles, France, as an exporter of wine, can sell it at a higher price and gain more revenue. This is beneficial for France as it improves their terms of trade.

On the other hand, the price increase in cars (which Germany exports) means that France has to pay more to import cars from Germany. This leads to a deterioration in France's terms of trade.