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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

Some economists warn that the persistent trade

deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

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?

For each of the following, indicate which type of government spending would justify a budget deficit and which would not.

a. Increased federal spending on Medicare

b. Increased spending on education

c. Increased spending on the space program

d. Increased spending on airports and air traffic control

How does the bottom portion of Figure 10.3, showing the international flow of investments and capital, differ from the upper portion?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany鈥檚 GDP; private savings is 20% of GDP; and physical investment is 18% of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?
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