What is the Gravity Model of Trade?
Explaining a trade model based on country location and size
The gravity model, initially made popular by the cartographer E.G. Ravenstein in 1889, was originated to study the impact of country size and location on migration patterns.
In 1954, economists Walter Isard and Merton Peck expanded the gravity model to examine the impact of country size and location on international trade. The work of Isard and Peck was later incorporated into a model by the Dutch economist Jan Tinbergen in 1962.
Tinbergen’s model builds upon two primary assumptions. The first assumption is that larger countries will attract more trade, just as a Newton’s law of gravity states that an object with a larger mass will attract objects with smaller mass. The second assumption is that location, and the geographic distance between two countries, will have an impact on the level of trade between those nations.
Tinbergen’s main equation can be written as follows:
In the equation above, Tij represents the bilateral trade between country i and country j, GDP represents the domestic production for both countries i and j, and Dij represents the geographical distance between the two countries. Instead of assuming that trade is directly proportional to the GDP of both countries and…
