Question

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

Short answer

The three factors that determine whether a nation has a higher or lower share of trade relative to its GDP are: (1) Size and geographic location of the nation, which affects its access to international markets and reliance on trade; (2) level of economic development, as highly developed countries with diversified economies tend to have a higher trade share; and (3) trade policies and agreements, with less restrictive policies and more agreements leading to a higher trade share.

Step-by-step solution

Factor 1: Size and Geographic Location of the Nation

The size and geographic location of a nation play a significant role in determining trade share relative to GDP. Larger countries with more significant internal markets tend to have lower trade shares relative to their GDP, while smaller countries with limited internal markets will rely heavily on trade, resulting in a higher trade share relative to GDP. Similarly, countries that have easier access to international markets due to their location will have a higher trade share than landlocked or geographically isolated nations.

Factor 2: Level of Economic Development

The level of economic development is also a determinant of trade share relative to GDP. Highly developed countries with advanced industries often have diversified economies, leading to a higher trade share. These nations can produce high value-added goods which can be exported to other countries. In contrast, less-developed nations with less diversified economies will have a lower trade share due to their limited ability to produce competitive goods and services in the international market.

Factor 3: Trade Policies and Agreements

Trade policies and agreements can have a significant impact on a nation's trade share relative to its GDP. Countries with less restrictive trade policies and more regional or international trade agreements are more likely to have a higher trade share. These agreements allow countries to access new markets, reduce trade barriers, and increase the overall volume of trade. On the other hand, countries with more restrictive trade policies or fewer trade agreements may have a lower trade share relative to GDP.