Gravity model of trade
Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
The gravity model says trade between two countries rises with their economic size (GDP) and falls with the distance between them. It works like Newton's law of gravity: big, close economies pull more trade towards each other. The model is useful as a benchmark. When actual trade falls well below its prediction, it points to hidden barriers.
Example
South Asia under-trades compared with what the model predicts. Trade within the region is only about 5% of its total trade. The causes are tariffs, non-tariff barriers, poor connectivity and India–Pakistan politics.
Related concepts
- Absolute advantage
- Comparative advantage
- Gains from trade
- Autarky
- Heckscher-Ohlin theory
- Stolper-Samuelson theorem
- Leontief paradox
- Intra-industry trade
- New trade theory
- Entrepot trade