Report on the Gravity Model

Added on - 28 May 2020

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Gravity Model1GRAVITY MODELBy (student name)Professor’s NameCollegeCourseDate1
Gravity Model2IntroductionThe report applies Gravity Model for the purpose of analyzing bilateral trade of othercountries and Vietnam of 2015. The model is a popular econometric model in international trade.The model came from its use of gravitational force concept as a method of explaining volume ofjoint trade flows between different countries. In my report I embark on the use of data oninternational trade of Vietnam and other countries. The approximate results revel that distanceand culture, economic size of foreign partners, economic size of Vietnam largely affectedbilateral trade flows between other countries and Vietnam. The report also included the use ofvaried variables, assumptions of their influences to Vietnam as a country, difficulties of gravityequations and their actual resolving. Gravity model is a practical success because it preciselyforetells trade flows of Vietnam and other countries for many goods and services. Nevertheless,gravity correlation can ascend in nearly all the trade model and it consists of trade costs whicharise as the distance increases. The question always arises in regard of what factors influencesthe selection of foreign trade partners of Vietnam for the purposes of exploiting the comparativeimportance of each country. Gross Domestic Product (GDP), geographical distance, the actualpopulation greatly influence trade flows between different countries like Singapore andMontanari. The first section states the literature review on the model and the advantages on theinternational trade. The second part describes and illustrates the actual meaning of gravity modeland the definition of various variables used. The third section demonstrates the analysis used inorder for the purposes of explaining the bilateral trade. The final part is the actual conclusion.Literature ReviewThe model is mostly used more often to empirically analyze trade between countries. Ithas been described as the workhorse of trade that involved different countries and its ability to2
Gravity Model3correctly estimate bilateral trade flow. In the recent past years there has been abnormal changeand progress both in improving its empirical estimation and understanding theoretical basis forthe entire equation. The name gravity model comes from its use of gravitational force concept asa method of explaining the volume of bilateral trade flows. At first, it was only based ontheoretical intuition, but later on, different theoretical foundation has been invented. Newton’slaw of gravity promoted the original gravity model of economic interaction over the space.The gravity model continues to be successful as it correctly predicts the actual trade flowsbetween countries for different goods and services. It uses to estimate the pattern of internationaltrade. The model basic form is made up of elements that are largely concerned of spatiality andgeography, gravity model are mostly being used to check rooted on hypotheses purely ineconomic theories of trade. Such theories suggest that trade will be built on relatively factorabundances. Countries with plenty of one factor would then produce goods which requiresrelatively big amount of factors in their real production. The gravity model of trade has also beenused in the area of international relations in order to determine the effect of treaties and allianceson trade activities. The model analyzes the effectiveness and efficiency of foreign tradeagreements. (Prehn, Brümmer and Glauben 2016).Lately, gravity model mostly describe bilateral the flows of trade between differentcountries that cannot be explained by other economic theories. Factors such as infrastructure,exchange rates and income differences are included to the standard gravity equation, are found tobe most significant determinant of bilateral trade flows (Nowak-Lehmann and Martinez-Zarzoso2004). The Vietnam bilateral trade is mostly affected by economic size, openness and commonlanguage, GDP per capita, and negatively by the actual area between the trading partners.Model Description3
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