International Trade: Measuring Openness and Its Impact on GDP

This article discusses the impact of international trade on GDP and how to measure a country's openness to trade. It also explores the trends in openness of Canada and Germany. The article highlights the correlation between openness and per capita GDP and the factors that affect a country's openness.

Running Head: INTERNATIONAL TRADE
International Trade
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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
References........................................................................................................................................6

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Answer 1
The ratio of trade to GDP indicates relative importance of trade in aggregate economic
activity. It is used as a measure of country’s openness in the world market. Globalization which
represent integration of an economy to the world is often measured by the percentage share of
trade in GDP (Giddens 2018). Higher the ratio, higher is participation of the nation in the world
market indicating a strong integration through the channel of trade.
Apart from trade flows, other measures that could be used for measuring county’s
openness include investment flows, flow of information and flow of people. The foreign direct
and portfolio investment measures interflow capital across nations (Martens et al. 2015). Cross-
border data or information usually flow through internet network. The cross border movement of
people across nation often uses as a measure of globalization.
There are different form globalization such as political globalization, social globalization
and economic globalization (Giddens 2018). By measuring globalization with share of trade in
GDP, we are measuring economic globalization which captures integration among nations in
terms of trade and resource exchange.

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Answer 2
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Canada
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Trade (% of GDP)
Figure 1: Trend in openness of Canada
The figure above shows trend in openness of Canada. In between 1985 and 1987 trade
share is Canada has declined slightly and remained constant until 1992. From 1992 onwards
trade share rose sharply. Share of trade in GDP began to fall since 2000 and remained almost
same from 2003 to 2005.
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Germany
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Trade (% of GDP)

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Figure 2: Trend in openness of Germany
Trade share in Germany has constituted an upward rising trend. Share of trade though
declined slightly from 1991 to 1993 but overall there is an increasing trend of openness.
Answer 3
When a county opens to trade in enjoys some benefits from the favorable position in
international trade. The first direct impact is on GDP of the nation. As GDP of the nation
increases people tend to have a higher per capita income (Bernanke, Antonovics and Frank
2015). The correlation coefficient between openness and per capita GDP is positive for both
Germany and Canada. The measured correlation coefficient for Germany and Canada are 0.79
and 0.75 respectively. The higher correlation coefficient for Germany indicates a stronger
relationship. Therefore, with increase in openness both the nations are likely to enjoy a higher
per capita GDP and hence, an improved standard of living.
Answer 4
In the last two decades of twentieth century, Canada’s tendency towards openness
increases. This is reflected from the export growth of goods and services. One factor that
contributed to increasing openness of Canada was the adjustment of the nation to the free trade
zone of North America. In the beginning of twenty first century export growth declined reducing
trade share in GDP. Canada’s lagged behind other developed nations in terms of its industrial
growth. This contributed to a sluggish export growth of the nation. Both the quality and quantity
of Canada’s export had declined (Klassen 2014). Factors leading to weaken external

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performance of Canada include boom in global resource prices, soaring Canadian dollar and
change in composition of export are some factors that affect Canada’s openness.
The openness of Germany has increased overtime. However, trade share does not
increases smoothly. Reunification of Germany during 1990 put the nation in a trade deficit. As
soon as development began in different dimension, Germany moved towards a trade surplus. The
first factor was the introduction of euro during 1999. The fixation of exchange rate significantly
contributed to country’s openness. Germany’s effort to keep wages low gave the nation
advantage over the euro nation (Elekdag, Muir and Wu 2015). This was mainly the result of
agreement between corporate sector bosses and trade union. The recovery from low investment
trade in another factor contributing to increasing openness of the nation.
References
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill
Higher Education.
Elekdag, S., Muir, D. and Wu, Y., 2015. Trade linkages, balance sheets, and spillovers: the
Germany-Central European supply chain. Journal of Policy Modeling, 37(2), pp.374-387.
Giddens, A., 2018. Globalization. In Sociology of Globalization(pp. 19-26). Routledge.

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Klassen, J. (2014). Joining empire: The political economy of the new Canadian foreign policy.
University of Toronto Press.
Martens, P., Caselli, M., De Lombaerde, P., Figge, L. and Scholte, J.A., 2015. New directions in
globalization indices. Globalizations, 12(2), pp.217-228.