Which term describes an index that measures a country's prices in relation to their average import prices?

The term that accurately captures the concept of measuring a country's prices in relation to their average import prices is "terms of trade." Terms of trade assess the relative prices of a country's exports compared to its imports, providing insight into the purchasing power that a country holds in international markets. Essentially, it reflects how much of a country’s imports can be purchased with its exports.

When the terms of trade improve, it means that a country can export goods that have a higher value compared to the goods it imports, thereby increasing national income and economic welfare. Conversely, if the terms of trade deteriorate, the country must export more to afford the same amount of imports, indicating potential economic challenges.

The other terms listed do not specifically focus on the relationship between a country's price levels and its import prices. The exchange rate pertains to the value of one currency in relation to another and does not measure price levels directly. The inflation rate refers to the general increase in prices over time within a country, and the trade balance concerns the difference between a country's exports and imports but does not directly address the prices of imports in relation to domestic price levels.