The Gravity Model

Question 1

Why does the value of trade between any two countries depend on the size of these countries’ economies?

Answer 1

As explained by the gravity model, the value of trade between two countries depends on the size (GDP) of the economies.
Other things equal, the trade between any two economies is larger, the larger either economy.

Question 2

What can the Gravity Model be used tp show?

Answer 2

The model can be used to indentify anomalies in trade.

Question 3

What can effect the value of trade between two countries, other than the size of these countries’ economies?

Answer 3

Physical distance –> Transportation cost
Trade agreements
Language barriers
National border (e.g. between US and Canada)