Question

7. Discuss the Gravity model, focussing on the predictions it makes for the pattern of trade.

Answer 1

The Trade Gravity Model is a central model in the international economic arena. It's like the other theories of gravity in the social sciences field. It makes predictions about bilateral trade flows and these predictions are based on the two-unit distance and their respective economic dimensions. Walter Isard used the model for the first time in 1954. For the purposes of trade between several countries, it may be considered a theoretical framework at the basic level.

The Gravity Model of Trade also includes factors like colonial history between the two countries, a number variables that are used for the purpose of accounting at the level of income, which means Gross Domestic Product per capita, tariffs, levels of price, contiguity and relationships in language. The Trade Gravity Model has been used in a wide range of areas such as, for example, international relations. The Gravity Model of Trade was used in the field of international relations to assess the impact of alliances and treaties on trade activities.

The gravity model estimates international trade patterns. While the basic form of the model consists of factors more related to geography and spatiality, the gravity model has also been used to test hypotheses rooted in purer commercial economic theories. One such theory predicts that trade will be based on abundance of relative factors. The Heckscher–Ohlin model is one of the popular relative variable abundance models.

It would be anticipated that those countries with a relative abundance of one factor would produce goods that require a relatively large amount of that factor in their output. While a generally accepted trade theory, most economists at the Chicago School assumed that the Heckscher–Ohlin model alone was enough to explain all trade, although Bertil Ohlin himself argued that the world is actually more complex. Research into real-world trading trends has produced a number of findings that do not fit comparative advantage theories ' expectations.