# The Gravity Model of Trade

THE GRAVITY MODEL OF TRADE 1 Assignment 1: The Gravity Model Of Trade: Do Size And Distance Matter For The Exports Of Japan? THE GRAVITY MODEL OF TRADE 2 Abstract In the field of international economics, the gravity model for trade reveals that bilateral trade is directly proportional with the extent of the economy (usually expressed in GDP) and inversely proportional with the geographical distance between the analysed entities. The present report illustrates the model for the case of Japan, elaborating the trade patterns created among it and its 9 main trade partners.

The parameters for the gravity equation are estimated and the relation between GDP and exports for the countries in question are depicted through a scattered plot, for a more in-depth view on the connections. By testing the model it can be observed that the trade relations of Japan are being influenced by the size of the economy and the distance to the trade partners. (JEL F100, F170) THE GRAVITY MODEL OF TRADE 3 The law of universal gravitation was published by Isaac Newton as a general physical law.

Its application was later on spread into various fields of research, succeeding to explain a series of scientific phenomena. In international economics, the gravity model of trade is used in order to predict bilateral trade flows in respect to the economic performance (measured in GDP) and distance between the two states taken into consideration. The present report aims to illustrate the gravity model of trade for the particular case of Japan, revealing how size and distance influence the country’s exports, centering the study on the relation among Japan and its 9 top trade partner countries.

The model will be tested by estimating the parameters of the gravity equation, namely the elasticities for GDP and distance. In order to estimate the gravity equation, the R statistical software has been used. The data set contains information regarding exports, GDP and distance to destination country, retrieved from the 2011 International Trade Statistics Yearbook of the United Nations. All data has 2011 as the year of reference. The GDP value for each country has been converted into billions of USD, in order to maintain the same unit of measure.

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