A worsening of the Terms of Trade, the index of the price of a
country's in terms of its imports, could be caused by
expenditure-reducing measures such as deflationary monetary or
fiscal policy (that will cause a general fall in prices of G&S).
Prices of would drop and would be relatively more expensive.
Assuming the elasticity of and do not play a big role in these
phenomena (perhaps if sum of elasticity of both and added up to
unity or a value of 1), Balance of trade may actually improve if
increase and fall. However, it may be unnecessarily costly in
terms of lost domestic employment and output. Basically when a
country’s Terms of Trade worsens, become more expensive relative
to the price of exports. Assuming the quantity of and were the
same, there would be a Balance of trade deficit when are more
expensive than exports. However, that may not necessarily be the
case. The outcome of the Balance of trade will largely depend on
the Price Elasticity of Demand (PED) of both and exports. (PED
is defined as the