Use the AS-AD model to show effects on GDP and price level of an improvement in a country's terms of trade.

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If a country's terms of trade improve, it will generally see an increase in GDP, along with a possible increase in the price level.  The reason for this is that aggregate demand will generally increase as the country's terms of trade improve.

A country's terms of trade is similar to...

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If a country's terms of trade improve, it will generally see an increase in GDP, along with a possible increase in the price level.  The reason for this is that aggregate demand will generally increase as the country's terms of trade improve.

A country's terms of trade is similar to its balance of trade.  It is a statistic showing the ratio of exports to imports.  As a country exports more and imports less, the aggregate demand for goods and services produced in that country increases.  When aggregate demand increases, (depending on where the country is on the aggregate supply curve) the country typically sees some increase in GDP as well as some increase in price levels.

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