Question

Suppose that a country experiences growth strongly biased toward its export, cloth, Group of answer choices this will tend to improve the country's terms of trade. this will tend to worsen the terms of trade for the country's trading partner. this will tend to worsen the country's terms of trade. this will increase the price of cloth relative to the imported good. this will tend to leave the country's terms of trade unchanged.

Answer 1

Answer:

this will tend to worsen the country's terms of trade.

Explanation:

We can imagine a country C whose main export is cloth. Currently country C is gaining from its trade because its opportunity cost of producing cloth is very low.

Since the country's economy is growing strongly because its cloth exports re growing, this will appreciate the country's currency. As the country's currency appreciates, is domestic cost of producing cloth will get closer to the world price of cloth.

This will result in an increase in the cost of exports and a decrease in the price of imports, which will end up hurting the country's economy and it will weaken its trade position.

Something similar happens to countries that rely heavily on exporting commodities. The country's economy grows, but the other industries suffer and eventually the cost of producing commodities increases, and the benefits gained from exports decrease. E.g. during several years Argentina's economy grew strongly solely based on exporting agricultural products. Soon inflation started to rise and the costs of producing agricultural products increased, lowering the gains of trade. Since the rest of the economy relied on the benefits generated by exporting soybean oil, corn and other byproducts, when those benefits decreased, the whole economy collapsed. It was like a giant exporting bubble.