# The Gravity Model of Trade: Do Size and Distance Matter for the Exports of Japan?

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.

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Example: China’s GDP 2011 = 47. 16 trillion CN? ;exchange rate: 1\$ = 6. 4588 CN? ;therefore, China’s GDP for 2011 amounts to 7,298,147 millions USD. Figure 1 shows Japan’s trade as percentage of the exports of the top-9 export destinations in 2011, versus the GDP as percentage of the total GDP reported by the top-9 export destinations. As it can be seen, China does a lot more trade with Japan than even with the U. S. A, the main reason being the small distance between the two states, which THE GRAVITY MODEL OF TRADE reduces transportation costs.