To Explain That Gravity Model Of Trade For You

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A standard observation is that places which are closer together trade with each other more than places which are further apart. Add to that the thought that larger economies will trade more with other larger economies – well, you know, more economic activity means more economic activity – and you get the gravity model of trade. So, therefore Britain’s trade future lies with those places nearby, in the EU, than with places further away like the Commonwealth or the US.

This is, sadly, actually the level of debate over Brexit at times. We should trade with France because it’s 26 miles away, so there. The point being that while the gravity model is true – among the best empirically supported of all economic observations – that’s not actually what it says. Rather, that those places which are closer by trade distance trade more with each other. Trade distance being a more complex point than mere geographical location.

At which point this lovely map.

“I think trade routes and topography explains world history in the most concise way,” Månsson explains in the very small print at the map’s lower right corner. “By simply studying the map, one can understand why some areas were especially important–and remained successful even up to modern times.”

The point here being that by showing the trade routes it is showing us this trade, or perhaps economic, distance which is what the gravity model is about. Valencia and Palma were very much closer – and trade very much more – than Valencia and Toledo, despite roughly equal distances crowfly wise.

The full map is here. And OK, this is 11 and 12 th century trade routes. But the same principles apply today. For example, as Brad Delong has pointed out, once you’re on the container transport route you can move 36 tonnes of anything to anywhere for under $5,000. Fiji is $5,000 – the useful measure of economic distance – from Adelaide and London. Someone merely 100 miles off the container routes is further away than Fiji whatever mere the miles distance tells us.

Whether Britain will prosper through trade after Brexit is still arguable. But it is economic, not geographical, distance which matters.

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Spike
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Also, container transport is a technological invention, and the ability to make new inventions, and to establish new container routes, could bring nations closer together (by reducing the costs of shipping between them) — then to invent products that are information and don’t require shipping at all.

Diogenes
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Diogenes

Bank of England had an article on that. Basically the gravity model in itself does not explain very much and is not much of a predictive tool but “We have seen that many trading relationships survive, unbroken, since the sixties and these survivors account for the bulk of total exports. These results are striking, but should we be surprised by them?” History explains the relationships better than this vague and ill-defined concept of gravity. It is quite difficult even to find a full account of this gravity concept and those accounts tend to focus on relative GDP and geographical distance.… Read more »

Southerner
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Britain didn’t trade with the colonies simply because they were colonies. It traded with them because the imperialists had a damn good idea which places were worth colonising and which could safely be left to the French, Belgians, Dutch, Germans et al.

Diogenes
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Diogenes

In fact, according to Wiki: “The model was first introduced in economics world by Walter Isard in 1954. The basic model for trade between two countries (i and j) takes the form of {\displaystyle F_{ij}=G*Mi*Mj/{D_{ij}}} In this formula G is the constant, F stands for trade flow, D stands for the distance and M stands for the economic dimensions of the countries that are being measured.” So in this formulation, it is definitely geographic distance rather than” trade distance” What does it even mean to talk about distances between countries? Where do you measure from? I have looked through six… Read more »

Pat
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Pat

If the gravity model works solely on the basis of geographic distance, then Japan could not have risen, Hong Kong would still be an impoverished fishing village, Singapore would still be a mud bank, Australia and New Zealand would be struggling. However if you ammend the model such that places with access to modern shipping are practically next door to each other, then it describes the world better. It also predicts that the coastal regions of large states, say USA, Canada, Australia, China, India as more prosperous than their interiors. That leaves landlocked European states as the outliers- and they… Read more »

Diogenes
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Diogenes

The mediaeval trade route map does very little to explain the success of Switzerland. So whenever some economist comes along to trot out the cliché about the gravity model of international trade being among the most robust and enduring findings of empirical economics, I will continue to shout “bullshit”. If Tom Chaney is right, the importance of distance in the model was not explained until 2013. That means it has stood the test of time for 5 whole years!

Quentin Vole
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Quentin Vole

The imbalance of physical trade with China (and most other countries) means that boatloads of empty containers are continually being returned. As a result, it costs my brother more to send a loaded container 60 miles to Liverpool2 than for the onward journey to Shanghai.

Quentin Vole
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Quentin Vole

The parentheses would have been better expressed as: (for most other countries, not just the UK)

Bongo
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Bongo

At closest approach the planet Venus is 6/10ths closer than the planet Mars. Venus is also rather bigger. The number of probes sent by earthlings to both is about equal. Why should this be? Surely the gravity theory would dictate we would have sent rather more to Venus which is way more interesting as well.
The answer, I suspect, is that Venus is rather more inhospitable.

bloke in spain
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bloke in spain

F_{ij}=G*Mi*Mj/{D_{ij}

Or in plain language – econobollocks. You can discover who trades with who by looking at who trades with who. Trying to produce a mathematical equation to predict who will trade with who is pointless.
But, then, much of economics is pointless. Apart from keeping academic economist employed.

Spike
Member

Mostly. As in a previous thread: Distance imposes a cost on trade. There are other costs, such as need to translate/convert, and costs to insure against risks, from revolution to expropriation.

So Dij, times a constant, should be one of many items to be summed. Economists can try to predict commerce with a hypothetical country that could be described exactly. But only businessmen measure the key variable: Do my customers want their stuff?

Spike
Member

“…at the price I would have to charge?”