2.1. The Gravity Model

Question 1

Who trades with whom?

Answer 1

More than 35% of the world output is sold across national borders, exceeding $25 trillion in 2019.

The largest 15 trading partners of the US accounted for 75% of the value of US trade.

The US’ biggest partners include Mexico, Canada and China.

Question 2

The gravity model

Answer 2

Three of the top 15 trading partners of the US are European nations: Germany, the UK and France.

These three countries have the largest GDP in Europe (they produce the largest value of goods and services in Europe).

This shows that the size of an economy is directly related to the volume of imports and exports.

The gravity model assumes that size and distance are important for trade.

Trade = B * (GDPi * GDPj) / Distance^n

Question 3

General gravity model

Answer 3

Tij = (A * Yi^a * Yj^b) / Dij^c

Now, doesn’t assume that trade is directly proportional to country size or inversely proportional to the distance between countries.

Question 4

How does the gravity model work?

Answer 4

Large economies tend to produce more goods and services, so they have more to sell in the export market.

Larger economies therefore generate more money from the goods and services sold, so they can buy more imports.

Trade between any two countries is therefore larger, the larger either economy is.

Question 5

Anomalies within the gravity model

Answer 5

The Netherlands and Belgium have transport cost and geographical advantages.

Both countries are located on the mouth of the Rhine and are the point of entry into northwestern Europe.

Ireland has strong cultural affinity due to the common language and their history of immigration. Ireland also hosts many US based multinational corporations.