GRAVITY MODEL

• Gravity models are used in various social sciences to predict and describe certain behaviors
that mimic gravitational interaction as described in Isaac Newton's law of gravity. ... A gravity
model provides an estimate of the volume of flows of, for example, goods, services, or people
between two or more locations.To describe the patterns of bilateral aggregate trade flows
between two countries A and B as Fifty years ago, Jan Tinbergen (1962) used an analogy
with Newton’s universal law of gravitation “proportional to the gross national products of those
countries and inversely proportional to the distance between them,”
•  
• T(A,B) ∝ GDPA)α (GDPB)β /DistAB)ζ
• Taking log of both sides log(T) = a
logGDPa + bLog(GDPb) –clog (D)

with α, β, ζ ≈ 1. The so called “gravity equation” in international trade has proven surprisingly
• stable over time and across different samples of countries and methodologies. It stands among
the
• most stable and robust empirical regularities in economics.
•  
• Costs of transportation include freight charges, warehousing costs, costs of
loading and unloading, insurance premiums, and interest charges while goods
are in transit. We will use the term transport or logistics costs to include all the
costs of transferring goods from one location (nation) to another.
• A homogeneous good will be traded internationally only if the pretrade price
difference in the two nations exceeds the cost of transporting the good from
one nation to the other.
• Consideration of transport and logistics costs explains why most goods and
services are not traded at all internationally. These are referred to as
nontraded goods and services. They are the goods and services for which
transport costs exceed price differences across nations. Thus, cement is not
traded internationally except in border areas because of its high weight-to-
value ratio. Similarly, the average person does not travel from New York to
London simply to get a haircut.