Gravity model of trade

Question 1

What are 2 parameters to explain bilateral trade flows?

Answer 1

Distance and economic mass

Question 2

What are the assumptions of Gravity model?

Answer 2

It assumes, that the bigger the economy, the more it produces and the more it trades, and a country as large would do the same, so trade flows between them would be big. It also assumes that greater distance entails larger transportation and communication costs.

Question 3

What factors explain other 40% of trade not explained by gravity model?

Answer 3

Trade agreements (institutional arrangements), language and culture.

Question 4

What is a border effect?

Answer 4

Countries that have the same physical distance but stricter import rules, will have less trade than those who don’t.