Question

According to the gravity model, trade between nations depends positively on the size of the trading nations and negatively on the distance between them. In light of this statement, discuss (in no more than 1500 words) the gravity model. In support of your discussion, you will need to:

1. Select a nation(s) and comment on its/their history of international trade. [Hint: You can use graphs and table to support your answer]

2. Highlight any trade agreement (if any) between your selected nation(s).

3. Review some of the empirical studies that determine the other factors affecting the trade between nation beside the size and distance.

Answer 1

The gravity model of trade was first presented in 1962 by Jan Tinbergen, who proposed that the size of bilateral trade flows between any two countries can be approximated by employing the ‘gravity equation’, which is derived from Newton’s theory of gravitation. While planets are attracted to each other in proportion to their sizes and proximity, so too are countries.

Relative size is determined by current GDP, and economic proximity is determined by trade costs – the more economically ‘distant’ the greater the trade costs.

The gravity model suggests that relative economic size attracts countries to trade with each other while greater distances weaken the attractiveness.

Initially, the gravity model was seen as an empirical one, without any particular grounding in trade theory, but the widespread adoption of the gravity model to explain patterns of trade has been seen by economists as a significant development on previous theoretical models.

For example, NAFTA is a regional free trade agreement between USA, Mexico, and Canada. US is indeed the largest trading partner of both Canada and Mexico. The bilateral trade between US and Canada was over $700 billion and that between Mexico and USA it was over $600 billion.

Thus, we can see that the gravity model of trade works in international trade.