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Chapter 10: Q. 30 (page 266)

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

Short Answer

Expert verified

Size of domestic economy, geographical location and history of trade patterns.

Step by step solution

01

Step1. Introduction

GDP refers total value of all the goods and services which are produced within the domestic boundary of the economy.

The level of trade is expressed as the part of or percentage of the total GDP which comprises of Exports.

02

Step2. Explanation

The three factors on which the size of the level of trade depends are:

1. Size of domestic economy: When the size of the economy is very large, they tend to trade most of the products internally as the aggregate demand is high enough to absorb all the production.

2. Geographical Location: If an economy is located near large economies, the level of trade increases due to reduced cost of transportation and ease.

3. History of trade patterns and relationships: If the economy has a history of trade, it shall continue to till today have a high level of trade.

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Most popular questions from this chapter

The United States exports 14% of GDP while Germany exports about 50% of its GDP. Explain what that means.

Imagine that the U.S. economy finds itself in the

following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by

\)50 billion, while the budget deficit and national savings remain the same?

In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance:

a. A lower domestic savings rate

b. The government changes from running a budget surplus to running a budget deficit

c. The rate of domestic investment surges

If a country is running a government budget surplus, why is (T – G) on the left side of the saving investment identity?
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