Question: Using the definition in note 4 for the terms of trade:
a. Calculate what happens to the terms of trade index for some country between 1995 and 1997, if, in 1995, the price index for its exports was 110 and the price index for its imports was 108; and in 1997, the price index of exports was 105 and the price index of imports was 112. Has there been an increase or a decrease in this country's terms of trade? If the country wishes to buy exactly the same physical quantity of imports in 1997 which it purchased in 1995, how much more, or how much less, will it have to export, in physical terms, in 1997 compared to 1995?
b. Examine what has happened to the terms of trade for two countries of your choice over a period of at least five years, using data in either the World Development Report or the Human Development Report. Does the trend you discover tend to support or refute the Prebisch-Singer hypothesis? Explain.