Overview
International trade has become increasingly important in stimulating economic growth by introducing competition, creating new markets and allowing countries to take advantage of their comparative advantages in manufacturing and producing goods that would otherwise be scarce or unavailable domestically. A measure of the reliance a country has on its foreign trade is known as its trade dependency ratio, which statistics the amount of exports and imports of goods and services relative to its Gross Domestic Product (GDP).
Methodology
The trade dependency ratio is a measure provided by the IMF, which surveys its member countries on an annual basis. The ratio is calculated as the sum of a country’s exports plus imports as a percentage of its GDP. Many factors can influence a country’s trade dependency ratio, such as developments in the global economy, its domestic production structure, market share and pricing power.
Analysis
There are various factors which can influence a country’s trade dependency ratio. Countries which operate in industries with low cost production or specialized goods may have increased foreign trade, as their goods may be more affordable or desirable than goods from other areas of the world. Countries with limited natural resources or a high dependence on imports of goods and raw materials may also have a correspondingly larger trade dependency ratio.
In addition to natural resources and production capabilities, a country’s access to markets can also affect its foreign trade. For example, some countries may have significant restrictions on imports and exports due to regional or international trade agreements, or the introduction of tariffs can further limit a country’s access to external markets.
Conclusion
International trade is an important part of a country’s economic growth, but the trade dependency ratio provides an indicator of how much a country relies on external trade. While there are a variety of factors which can influence the trade dependency ratio, including access to markets, production capabilities and natural resources, its overall effect is to provide an insight into how dependent a country is on foreign trade.
