Question

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

Short answer

Size of the domestic economy, geographical location, and history of trade patterns are the three factors that will determine whether a nation has a higher or lower share of trade relative to its GDP.

Step-by-step solution

Step 1. Introduction

GDP refers to the total value of all products and services generated within a given economic zone. The amount of products and services exported as a percentage of GDP is used to calculate the level of trade.

Step 2. Factor I: Size of domestic economy

The size of the domestic economy is the first factor to consider. The size of the economy has a significant impact on whether a country has a larger or lower level of trade. Large economies, such as the United States, have a lower level of trade since they exchange their produced output within their economy. As a result, large economies like the United States export less. In contrast, a country like Sweden's economy is less able to produce within its boundaries, resulting in a high level of exports and trade.

Step 3. Factor II: Geographical location

The second factor is the geographical location. Due to lower transportation and communication costs, economies with neighbors have a high level of trade.

Step 4. Factor III: History of trade patterns

The history of trade patterns is the third factor to consider. If trade patterns have already been established in those economies, they will have a level of trade.

Step 5. Example

All of these factors combined will help in determining the level of trade between economies. For example, a country like Sweden has neighbors and a well-established trade pattern, yet its size is small and its trade level is high.