Q. Other things being equal, a rise in a country's terms of trade enhances its welfare. What could happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?
Answer: Let us presume that the terms of trade or technically the net commodity terms of trade improve therefore the relative price of a country's exports increase. This would reasonably lead to a shift away by world consumers to alternative goods. If the demand (requirement) for a country's exports is flexible, the quantity decrease likely proportionally larger than the per unit price increase. This term of trade effect would essentially lower the country's real income and economic welfare.