Gravity model Assignment Help

Assignment Help: >> Alternative explanations of trade - Gravity model

Gravity model:

One alternative explanation  to trade theory came from what  is known as the social physics school of thought in economics. The gravity model of  trade  that used the gravity theory of Newton in physics mainly represented the alternate trade-determinants.

The gravity model of  trade in international  economics, similar  to other gravity models in social science, predicts that bilateral trade flows are based on the economic sizes (often using GDP measurements) and distance between two units. The model was first used by Jan Tinbergen in 1962.  The  basic theoretical model for trade between two countries (i and j) takes the form of:  

1994_Gravity model.png

Where F  is the trade  flow, M is  the economic mass (or GDP)  of each country, D is  the distance and G  is  a constant. Taking  logarithms, we can convert  the equation (1)  into a  linear  form  for  econometric analysis where constant G becomes a as shown in equation (2)

16_Gravity model1.png

The model often  includes variables  to account for income level  (GDP per capita), price  levels, language relationships, tariffs, contiguity, and  colonial history (whether Country1 ever colonised Country2 or vice versa). The gravity  model estimates the pattern  of  international trade. While the model's basic  form  consists of  factors that have more to do with  geography and spatiality, the gravity model has been used to test hypotheses rooted in purer economic theories of trade as well.

Using the gravity model, countries with  similar levels of income have been shown to trade more. Helpman and Krugman see this as evidence that these countries are trading in differentiated goods because of their similarities. This casts some doubt about the impact Heckscher-Ohlin has on the real world.

The gravity model estimates  the  pattern of international trade. While  the model's basic  form consists of factors that have more to do with geography and spatiality, the gravity model has been used to  test hypotheses rooted in purer economic theories of trade as well. Using the gravity model, countries with similar levels of income have been shown to trade more. Helpman and Krugrnan see this as evidence that these countries are trading  in differentiated goods because of their similarities. This casts some doubt about the impact Heckscher-Ohlin has on the real world.

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