Gravity Model of Trade


The Gravity Model of Trade is elaborated on by experts in two clips.

  1. Eli Dourado, a Senior Research Fellow in Economics, explains the gravity model of trade by likening it to the physical law of gravity. He highlights that trade between two cities or places depends on their "economic mass" (maybe measured by size or GDP) and the "distance" between them, which encompasses the costs involved in moving goods, services, and resources. Reducing these costs significantly, such as by half, could potentially double the trade activities between these regions, significantly boosting economic interactions 1 .

  2. Ed Leamer, an economist, discusses the gravity model's relevance despite technological advancements. He uses historical data to show that most economic transactions still occur within close geographic proximity. Leamer points out that although communication and transportation costs have decreased, making the world seemingly smaller, proximity still plays a crucial role in trade. This enduring impact of distance suggests that lower wages in distant places do not wholly neutralize the advantages of nearness in trade 2 .

These discussions reinforce that despite global advancements, proximity remains a significant factor in trade, echoing the principles of the gravity model.

Boosting Trade Efficiency

Eli explains the gravity model of trade, comparing it to the concept of gravity between two cities. By reducing the cost of travel and trade between two cities, economic activity and collaborations increase. The same principle can be applied globally, boosting collaboration and cooperation across space.

Invest Like the Best

Eli Dourado - Frontiers for Productivity - [Invest Like the Best, EP. 225]