Examine how Gravity model explains international trade
Examine how Gravity model explains international trade
Gravity model - Gravity models have long been used to explain bilateral trade in goods. The gravity model of international trade predicts bilateral trade flows based on the economic sizes and distance between two units.The gravity model suggests that relative economic size attracts countries to trade with each other while greater distances weaken the attractiveness. The name came from its utilizing the gravitational force concept as an analogy to explain the volume of bilateral trade flows.
Formula for the gravitational model - Let there are two countrie i and j
If we explain this model with the help of the physics gravitational force then ,
The gravitational force between two objects (apple and head) is directly proportional to each of their masses and inversely proportional to the square of the distance between them.
- Larger countries trade more than smaller ones
- Trade costs between two trade partners reduce trade between them.
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