Although robust imports and exports are important for a vital economy, some countries are actually dangerously overdependent on foreign trade. The U.S. isn't one of them and hasn't been for a long time, but South Korea and a couple of other foreign countries popular with many investors right now, are much too trade-dependent. This makes them potentially risky places to invest in.

TUTORIAL: Economic Basics: What Is Economics?

In the case of South Korea, economists say the country's "dependence ratio" is way too high. Although it may sound complicated, the dependence ratio is simply the ratio of imports and exports. In other words, trade to gross domestic product (GDP). GDP is a broad measure of the health of a country's economy that is defined as the monetary value of all finished goods and services produced within that country during a specific time period. (For related reading, see What Is GDP and why is it important?)

Dependence Ratio Rising
Although usually on the higher side, the dependence ratio for South Korea has soared in the first quarter of 2011 to about 110%, reflecting the increasingly disproportionate role of foreign trade in that country's economy. The dependence ratio for China is about 49%, while Japan and the U.S. each have a dependence ratio of only about 25%, suggesting that these three countries are much more self sufficient economically.

The big problem with being too trade-dependent is it vastly increases a country's vulnerability to economic shocks originating outside its borders. For instance, if the U.S. fell back into recession or Europe's debt problems worsened and further hindered that region's economy, South Korea's economy might slow down even more severely since most of its trade is with the U.S. and Europe. For South Korea, the damage would probably be the worst in the automobile and electronic products industries, according to the LG Economic Research Institute, a private South Korean business and economic think tank.

A country is more prone to being trade-dependent if it's relatively small like South Korea, which only has a population of about 49 million (compared with about 128 million, 312 million and 1.3 billion, respectively, for Japan, the U.S. and China). A small population means a small domestic market, which forces a country to rely a lot more on foreign trade for economic growth and prosperity.

Germany and Mexico
Along with South Korea, Germany and Mexico are also known for being trade-dependent, though to a lesser extent. Germany, with a population of only about 82 million, has a dependence ratio of 87% stemming mainly from its reliance on the European Union for trade. It wouldn't be much of a surprise to see a sharp slowdown in Germany's fast-growing economy soon, since the rest of Europe is instituting austerity measures that are apt to greatly reduce demand for German exports.

Mexico has a substantially larger population than Germany (nearly 113 million.), so as you might expect, its dependence ratio is lower at 55%. This is still fairly trade-dependent. Because Mexico relies so heavily on the U.S. for trade, its economy suffered worse than other Latin American economies during the 2009 recession.

The Bottom Line
If you're thinking of investing in a foreign country, as part of your overall research, find out its dependence ratio to get an idea of how closely the country's fortunes are tied to those of other countries. Reasonably current dependence ratios are pretty to easy find on the Internet by doing a Google search on the name of a particular country and the words, trade dependence ratio.

You shouldn't necessarily avoid investing in a country just because its dependence ratio is high. The ratio is only one indicator of the riskiness of the investment, and it's up to you to decide how much risk you're willing to take. When you consider the dependence ratio along with all the other facts you dig up, you may end up deciding to make a large investment in a particular country, a small one or none at all. (For related reading, see 5 Economic Effects Of Country Liberalization.)

Related Articles
  1. Investing

    What a Fed Delay Means for the ECB & BoJ

    The Fed’s continued delay has repercussions for more than just the U.S. economy and markets. The ECB and the BoJ may support the case for stocks in Europe.
  2. Investing

    How Worried Should We Be About China?

    An economic slowdown, a freezing up in trade and plunging markets and currencies are casting a shadow across Asia—and the globe. How worried should we be?
  3. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  4. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  5. Investing Basics

    Learn How To Trade Crude Oil in 5 Steps

    Crude oil and energy markets are specialized venues. Here are five steps to take to build consistent profits.
  6. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  7. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  8. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  9. Retirement

    4 Reasons Why Americans Retire in Mexico

    Learn why Mexico's low cost of living, inexpensive health care, natural beauty and culture make it such a popular retirement destination for Americans.
  10. Entrepreneurship

    Top 3 Most Successful Korean Entrepreneurs

    Discover the backgrounds of some of the most successful Korean entrepreneurs and information about the companies and projects leading to their success.
  1. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  2. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  3. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  4. Is Brazil a developed country?

    Brazil is not a developed country. Though it has the largest economy in South America or Central America, Brazil is still ... Read Full Answer >>
  5. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>
  6. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!