# The Difference between Level of Trade and the Trade Balance

By the end of this section, you will be able to:

• Identify three factors that influence a country's level of trade
• Differentiate between balance of trade and level of trade

A nation’s level of trade may at first sound like much the same issue as the balance of trade, but these two are actually quite separate. It is perfectly possible for a country to have a very high level of trade—measured by its exports of goods and services as a share of its GDP—while it also has a near-balance between exports and imports. A high level of trade indicates that a good portion of the nation’s production is exported. It is also possible for a country’s trade to be a relatively low share of GDP, relative to global averages, but for the imbalance between its exports and its imports to be quite large. This general theme was emphasized earlier in Measuring Trade Balances, which offered some illustrative figures on trade levels and balances.

### Key Concepts and Summary

There is a difference between the level of a country’s trade and the balance of trade. The level of trade is measured by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports.

Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if that money is invested in productivity-boosting investments it can lead to an improvement in long-term economic growth.

### Self-Check Questions

The United States exports 14% of GDP while Germany exports about 50% of its GDP. Explain what that means.

Germany has a higher level of trade than the United States. The United States has a large domestic economy so it has a large volume of internal trade.

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

1. Living in an especially large country
2. Having a domestic investment rate much higher than the domestic savings rate
3. Having many other large economies geographically nearby
4. Having an especially large budget deficit
5. Having countries with a tradition of strong protectionist legislation shutting out imports
1. A large economy tends to have lower levels of international trade, because it can do more of its trade internally, but this has little impact on its trade imbalance.
2. An imbalance between domestic physical investment and domestic saving (including government and private saving) will always lead to a trade imbalance, but has little to do with the level of trade.
3. Many large trading partners nearby geographically increases the level of trade, but has little impact one way or the other on a trade imbalance.
4. The answer here is not obvious. An especially large budget deficit means a large demand for financial capital which, according to the national saving and investment identity, makes it somewhat more likely that there will be a need for an inflow of foreign capital, which means a trade deficit.
5. A strong tradition of discouraging trade certainly reduces the level of trade. However, it does not necessarily say much about the balance of trade, since this is determined by both imports and exports, and by national levels of physical investment and savings.

### Review Questions

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

What is the difference between trade deficits and balance of trade?

### Critical Thinking Questions

Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?

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.

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