describe the gravity trade prediction for trade between two countires?
In international economics, the gravity model of global commerce is a model that forecasts bilateral trade flows based on the economic sizes and distance between two units. There is "overwhelming evidence that trade tends to diminish with distance," according to research.
Walter Isard was the first to present the model to the field of economics in 1954. The fundamental model for commerce between two countries I and j) is
In this formula, G represents a constant, F represents trade flow, D represents distance, and M represents the economic aspects of the measured countries. By using logarithms, the equation can be transformed into a linear form for econometric analysis. Economists have used the model to examine the factors that influence bilateral trade flows, such as shared borders, languages, legal systems, currencies, and colonial legacies, as well as to assess the effectiveness of trade agreements and organizations like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) (Head and Mayer 2014). In international relations, the model has been used to assess the influence of treaties and alliances on trade (Head and Mayer).
Other bilateral flow data (also known as 'dyadic' data) such as migration, traffic, remittances, and foreign direct investment have also been used to test the model.
The model has been empirically successful because it reliably predicts trade flows between countries for various products and services. Still, some researchers have long believed that the gravity equation has no theoretical foundation.
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