When working in ESRI’s ArcMap, every layer you add has its file location saved inside the map document. The location of the layer becomes important when you are trying to share your map document(s) with others. If ArcMap cannot locate the layer, it will place a red exclamation (!) point next to the layer name to indicate that you need to repair the file source path.
Using absolute paths, the location for a file would look something like this “C:\Data\GIS\Shapefiles\NJ\State_Boundary.shp”. To share this map now with others they are going to need the exact same paths to the map layers. For this reason alone, it tends to be better to use relative paths.
Relative paths specify the location of the layers relative to the current location of the map document on disk. The advantage is if a map document and associated folders are moved to a new drive, ArcMap will still be able to find the maps and their data by traversing the relative paths. So this is the preferred method to use, specially for sharing map documents.
1. To change these settings for the current map document you are using, go to File->Map Document Properties…
2. Check the checkbox at the bottom that says: Store relative pathnames to data sources… Click OK
3. To make all future map documents use relative paths click Customize->ArcMap Options…
4. Make sure you are on the General Tab… now check the checkbox that says: Make relative paths the default for new map documents… Click OK