4. Please solve the following problems and show your work for full points a. The

Question

4. Please solve the following problems and show your work for full points

a. The trade-to-GDP ratio for a nation that had $600 million in exports, $400 million in imports, and GDP of $2,000 million would be

___________?

b. If export to GDP ratio is 0.2 and import to GDP ratio is 0.25, then trade to GDP ratio is _____________

c. If a country has a trade to GDP ratio of 0.45 with exports of 800 million and imports of 900 Million, its GDP would be _____________

d. Suppose a country’s GDP increases by 5%, but its trade flows remain the same. If its previous trade to GDP ratio was 0.4, what is the country’s new trade to GDP ratio?

Explanation / Answer

a. Trade to GDP ratio = Trade /GDP = (export-Import)/GDP

Trade to GDP ratio = (600-400)/2000 = 1/10 = 0.1

b. Export to GDP = Export / GDP = 0.2

or

Export = 0.2GDP ................ eq i

and

Import to GDP ratio = Import/ GDP = 0.25

or

Import = 0.25GDP ................eq ii

Trade to GDP = (Export-Import)/GDP

Now from eq i and ii

Trade to GDP ratio = (0.2GDP - 0.25GDP) / GDP = -0.05GDP/GDP = -0.05

c. Trade to GDP = Trade/GDP = (export-Import)/GDP = 0.45

exports = 800 million, imports = 900 milion

then

(export - Import)/GDP = 0.45

(800-900)/GDP = 0.45

GDP = 100/0.45 = 222.222 million

d. Previous Trade to GDP = 0.4

or

Trade/GDP = 0.4

or

Trade = 0.4 GDP ........... eq iii

now GDP increases by 5%

thus new GDP = GDP + 0.05GDP = 1.05GDP

hence new GDP = 1.05GDP ............ eq iv

now, new Trade to GDP ratio = Trade/new GDP

from eq iii and iv

Trade/new GDP = 0.4GDP / 1.05GDP = 0.380

thus new trade to GDP ratio is 0.380

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