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Country a and Country B Both Have the Same Gnp and Balanced Trade

In: Business and Management

Submitted By sandra161
Words 387
Pages 2
Country A and Country B both have the same GNP and balanced trade, however their trade value are of a big difference. Country A’s import and exports value 100 while that of Country B is 1,000,000.From their trade volume, we can figure out that Country A is relatively less active in engaging international trade and it’s close to a closed economy, while that of Country B is very active in international trade indicating a free trade economy.

Given GDP= C +I +G+X-M, with open market to trade and larger trade volume, investors will invest more in country B and thus country B will have a relatively larger share in investment in the GDP component. Moreover, consumption in country B also shares a relatively larger proportion in the GDP than country A does because a more open market with larger imports favor consumption as choices are more and at lower prices while large exports increase local wages and thus push consumption. On the other hand, in a closed economy, with very little trade, consumption and investment will be relatively weak but government expenditure will be overwhelming to cover up the relative less weighted consumption and investment so as to equalize GNP with country B. Therefore, with lager trade volume, and greater consumption and investment driven, country B has a faster economic growth in terms of real GDP.

However, country B, having a faster economy growth compared with country A, is supposed to have a greater GNP as well. But the case is that both the countries have the same GNP. What may account for this is that, given GDP + NIFA = GNP, where NIFA is net income from abroad, as country B has faster economy growth, GDP should be larger in country B. However, because of open market for trade, lager foreign investment in country B will make its NIFA become negative as foreign investors earn more income away from country B that country B earns from...

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