Gravity
- Benchmark
o Helpman 1987 = idealised world without (trade) barriers
Foreign goods are as accessible and desirable as
domestic ones
Each country consumes its share in global production
from every other country’s production
o Exporter = i importer = n
Xn
X ¿ = imports from country n to country i = X =
XW i
bilateral imports
X = production in country i ¿ ∑ X ¿
i
n
o The world = W
X W = world production ¿ ∑ X i
i
X
World imports = ∑ ∑ X ¿ =∑ X n (X W −X n )
n i ≠n n W
Share of imports in world production = imports to GDP
ratio
( )
2
X¿ Xn Xn
= ∑∑ =∑ −∑ =1−H = BENCHMARK
n i ≠n X W n XW n XW
H = Herfindahl index for the concentration of
consumption
o Graph
benchmark for flat world is far away from our openess (60%
gap) so even if globalisation keeps increasing there would be a
gap
- Alternative perspective
o Flat world ideal
previous index assumed frictionless world where all countries
are equally connected, in reality countries are located at
, different distances from each other => distance affects trade
costs
X ¿¿ = trade between countries without impact of bilateral
frictions
o The world is far from flat world ideal
many countries would benefit if we would be more open and
integrated
Trade is rising faster than GDP
Globalization gap much wider than total increase in
openess
Distance deters trade even more today than in 50s
- The force of gravity
o What separates us, why are we not fully integrated yet, …?
Gravity models will help us answer these questions by
explaining and predicting trade patterns between
countries drawing an analogy to Newton’s law of gravity
Handel lijkt op Newtons zwaartekracht: sterker als
landen groter zijn, zwakker als afstand tussen landen
groter is
o Aggregate trade flows
total exports without breakdown by product, bilateral = from
country to country and not firm to firm, focus on 1 year (2015)
Trade – economic size (GDP) = positive relation
Trade – distance = negative relation
Other determinants = bilateral frictions: culture, policy,
language, currency, …
- Naive gravity model (Tinbergen 1962)
o Called naive because its and adhoc model that lacks detailed
theoretical foundation
YαY γ
o X ij =G i θ j =G Y αi Y γj ϕ ij = trade flow from i to j
D ij
o G = constant of proportionality
o Y αi = economic output of exporter i Y γj = income of importer j
Y i Y j = indication of economic size
α γ
o Dθij = distance between 2 countries (= proxy for trade costs)
o ϕ ij =exp (θdist∗log ( Distij ) +θ FTA∗FTA ij + …) = other trade frictions
FTA = free trade agreement
- General gravity model
o X ij =G Si M j ϕ ij
o Si = exporter characteristics M j = importer characteristics
o Estimation as lineair model
, log ( x ij )=g+ si +m j+ ϕ ij + ε ij
Example: log distance = -0,826 => if you increase
distance by 1% trade between 2 counties decreases with
0,8%
- Other frictions
o Taste
olive trees don’t grow as well in Western part of France as in
the South => influences consumption, production and trade of
for example olive oil
o Conflict
trade between Pakistan and rest of world was at all time low
when Pakistan became independent
o Trade 4000 years ago (dia 25)
ancient trade patterns followed formular similar to gravity
model => model is not just economic tool but reflects
fundamental pattern in human trade behavior + model is
timeless and universal
- Conclusion
o We do not live in a flat world
o Distance still matters a lot for trade and other frictions
- Benchmark
o Helpman 1987 = idealised world without (trade) barriers
Foreign goods are as accessible and desirable as
domestic ones
Each country consumes its share in global production
from every other country’s production
o Exporter = i importer = n
Xn
X ¿ = imports from country n to country i = X =
XW i
bilateral imports
X = production in country i ¿ ∑ X ¿
i
n
o The world = W
X W = world production ¿ ∑ X i
i
X
World imports = ∑ ∑ X ¿ =∑ X n (X W −X n )
n i ≠n n W
Share of imports in world production = imports to GDP
ratio
( )
2
X¿ Xn Xn
= ∑∑ =∑ −∑ =1−H = BENCHMARK
n i ≠n X W n XW n XW
H = Herfindahl index for the concentration of
consumption
o Graph
benchmark for flat world is far away from our openess (60%
gap) so even if globalisation keeps increasing there would be a
gap
- Alternative perspective
o Flat world ideal
previous index assumed frictionless world where all countries
are equally connected, in reality countries are located at
, different distances from each other => distance affects trade
costs
X ¿¿ = trade between countries without impact of bilateral
frictions
o The world is far from flat world ideal
many countries would benefit if we would be more open and
integrated
Trade is rising faster than GDP
Globalization gap much wider than total increase in
openess
Distance deters trade even more today than in 50s
- The force of gravity
o What separates us, why are we not fully integrated yet, …?
Gravity models will help us answer these questions by
explaining and predicting trade patterns between
countries drawing an analogy to Newton’s law of gravity
Handel lijkt op Newtons zwaartekracht: sterker als
landen groter zijn, zwakker als afstand tussen landen
groter is
o Aggregate trade flows
total exports without breakdown by product, bilateral = from
country to country and not firm to firm, focus on 1 year (2015)
Trade – economic size (GDP) = positive relation
Trade – distance = negative relation
Other determinants = bilateral frictions: culture, policy,
language, currency, …
- Naive gravity model (Tinbergen 1962)
o Called naive because its and adhoc model that lacks detailed
theoretical foundation
YαY γ
o X ij =G i θ j =G Y αi Y γj ϕ ij = trade flow from i to j
D ij
o G = constant of proportionality
o Y αi = economic output of exporter i Y γj = income of importer j
Y i Y j = indication of economic size
α γ
o Dθij = distance between 2 countries (= proxy for trade costs)
o ϕ ij =exp (θdist∗log ( Distij ) +θ FTA∗FTA ij + …) = other trade frictions
FTA = free trade agreement
- General gravity model
o X ij =G Si M j ϕ ij
o Si = exporter characteristics M j = importer characteristics
o Estimation as lineair model
, log ( x ij )=g+ si +m j+ ϕ ij + ε ij
Example: log distance = -0,826 => if you increase
distance by 1% trade between 2 counties decreases with
0,8%
- Other frictions
o Taste
olive trees don’t grow as well in Western part of France as in
the South => influences consumption, production and trade of
for example olive oil
o Conflict
trade between Pakistan and rest of world was at all time low
when Pakistan became independent
o Trade 4000 years ago (dia 25)
ancient trade patterns followed formular similar to gravity
model => model is not just economic tool but reflects
fundamental pattern in human trade behavior + model is
timeless and universal
- Conclusion
o We do not live in a flat world
o Distance still matters a lot for trade and other frictions
