Chapter 2 Notes

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University of Toronto Scarborough
Economics for Management Studies
Garth Frazer

Chapter 2 World Trade An Overview NotesWho Trades with WhomSize Matters The Gravity Model3 of the top 10 US trading partners are European nations Germany the UK and Francethese 3 countries are the largest European economies and have the highest values of GDPthere is a strong empirical relationship between the size of a countrys economy and the volume of both its imports and its exportslooking at world trade as a whole economists have found that an equation of the following form predicts the volume of trade between any two countries fairly accuratelyTAYYDwhere A is a constant term T is the value of ijijij ijtrade between country i and country j Y is country is GDP Y is country js GDP and D is the distance between the two countriesijijthat is the value of trade between any two countries is proportional other things equal to the product of the two countries GDPs and diminishes with the distance between the two countries this equation is known as the gravity model of world tradeabceconomists estimate a somewhat more general gravity model of the following formTAYYDijijijequation says that the 3 things that determine volume of trade between any 2 countries are size of 2 countries GDPs and distance between them without specifically assuming that trade is proportional to product of 2 GDPs and inversely proportional to distanceinstead a b and c are chosen to fit the actual data as closely as possibleImpediments to Trade Dista
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