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 domestic economy, geographical location and history of trade patterns.

Step-by-step solution

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.

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.