The Basics
- Simple definition: A model predicting that trade between two countries is proportional to their economic size (GDP) and inversely proportional to the distance between them.
- Core idea: Big economies trade more with each other; faraway countries trade less.
- Think of it as: Like gravitational attraction – larger masses (economies) attract more, distance weakens the pull.
What It Actually Means
The gravity model, inspired by Newtonian physics, is one of the most empirically successful in economics. Trade flow = constant × (GDP₁ × GDP₂) / distance. Larger economies trade more because they produce and consume more. Distance reduces trade due to transport costs, cultural differences, information barriers, and time. The model also includes factors like common language, borders, trade agreements, and colonial ties.
Example
Pakistan trades more with China (a large economy, relatively close) and less with, say, Chile (a smaller economy, far away). Trade with India would be huge under gravity (large, close), but political barriers override the natural pull.
Why It Matters
The gravity model helps estimate trade potential, assess trade agreement impacts, and understand why some countries trade below potential. It’s used by policymakers and international organizations.
See also
International Trade • Trade Agreements • Distance • Border Effect • Trade Potential
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