Analyzing Trade Between NAFTA Countries

Using the Gravity Model

Abstract
The North American Free Trade Agreement (NAFTA) has had a significant
impact on trade flows among its member countries, namely the United States,
Canada, and Mexico. Analyzing the dynamics of trade within NAFTA is crucial
for understanding the economic relationships among these nations. This paper
explores how the gravity model, a widely used econometric tool, can be applied
to analyze trade patterns between NAFTA countries. By employing this model,
we aim to gain insights into the determinants of trade between these nations
and to evaluate the impact of NAFTA on trade relationships.

Introduction
NAFTA, which was established in 1994, has played a pivotal role in promoting
trade among its member countries. Trade between the United States, Canada,
and Mexico has grown significantly since its inception, making it an ideal case
study for the application of the gravity model. The gravity model is an economic
framework used to predict and explain bilateral trade flows between two countries.
It is based on the principle that trade is positively related to the size of the
economies involved and negatively related to the distance between them.

Literature Review
The gravity model has been widely employed in trade analysis, and numerous
studies have applied it to investigate NAFTA’s impact on trade. Past research
has shown that the gravity model is effective in explaining trade patterns between
the NAFTA countries. Key determinants that have been examined include GDP,
distance, population, and trade agreements.
• GDP: Higher GDP in both the exporting and importing countries typically
leads to increased trade volumes. In the context of NAFTA, the United
States, Canada, and Mexico have seen significant economic growth over
the years, contributing to the expansion of intra-NAFTA trade.
• Distance: The gravity model accounts for the negative effect of distance

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 on trade. In the case of NAFTA, geographical proximity has been a major
factor facilitating trade flows, especially between the United States and its
neighboring countries.
• Population: Larger populations can provide a larger pool of consumers
and potential trading partners, which can boost trade. The United States’
substantial population and its proximity to Canada and Mexico have been
significant factors promoting trade.
• Trade Agreements: NAFTA itself is a trade agreement that has sub-
stantially reduced trade barriers among its members, resulting in increased
trade volumes. This underscores the relevance of incorporating trade
agreements into the gravity model.

Methodology
To conduct our analysis, we will utilize a gravity model equation tailored to the
NAFTA context:

Yi · Yj
Tij = A ·
Dij

Where: - (T_{ij}) represents the trade flow between country (i) and country
(j). - (A) is a constant. - (Y_i) and (Y_j) are the GDPs of countries (i) and (j),
respectively. - (D_{ij}) is the distance between countries (i) and (j).
We will collect data on GDP, distance, and other relevant variables for the
NAFTA countries and estimate the coefficients of this model using econometric
techniques.

Results and Discussion

The results of our analysis will provide insights into the key determinants of
trade between NAFTA countries. We expect to find that GDP, geographical
proximity, and the effects of NAFTA itself will have a significant impact on trade
flows within the region. Additionally, the model will allow us to quantify the
impact of these determinants and estimate the sensitivity of trade to changes in
these variables.

Conclusion
Analyzing trade patterns within NAFTA using the gravity model offers valuable
insights into the dynamics of trade among these countries. This research will
contribute to a better understanding of the economic relationships within NAFTA
and the effectiveness of trade agreements like NAFTA in promoting regional
trade. By examining the role of GDP, distance, and other factors, we can assess

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the drivers of trade and inform policies that aim to enhance trade relationships
within the region.
In summary, the gravity model provides a robust framework for evaluating
trade flows between NAFTA countries and is an essential tool for policymakers,
economists, and businesses seeking to understand and leverage the economic
dynamics of this vital trade bloc.

References
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