Question

Use the Gravity model to predict the effect to explain NAFTA and EU.

Use the Gravity model to predict the effect to explain NAFTA and EU.

Homework Answers

Answer #1

Gravity Model

  • this model was first used by Jan Tinbergen.
  • it predicts bilateral trade flow based on the size of the economy,the level of GDP and the distance between the two participant countries
  • it perfectly predicts trade flow of goods and services between two countries
  • it estimates a pattern of international trade

To explain Gravity Model in terms of NAFTA and EU

  • this model brings an impetus to the host countries by economic development
  • foreign direct investment FDI play an important role in the progress of the nation
  • the FDI is greatly affected by the economic size and the distance between the countries. in the recent times due to rise in globalization the factor of distance has reduced considerably.
  • FDI plays a major role in bilateral trade.
  • distance and the size of the economy in terms of GDP plays a vital role in Gravity model of NAFTA and EU
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