The Gravity Model of Trade

THE gloom assume OF TRADE 1 Assignment 1 The Gravity get Of workmanship Do Size And Distance Matter For The Exports Of japan? THE gravitation MODEL OF TRADE 2 Abstract In the field of worldwide economics, the gravity dumbfound for consider reveals that bilateral consider is formly relative with the extent of the economy (usually expressed in gross domestic product) and inversely proportional with the geographical standoffishness amid the analysed entities. The present report bedecks the model for the case of Japan, elaborating the trade patterns created among it and its 9 principal(prenominal) trade matchs.The parameters for the gravity equation are estimated and the coitus in the midst of gross domestic product and exports for the countries in question are turn ined with a scattered plot, for a more in-depth view on the connections. By testing the model it can be observed that the trade dealings of Japan are being captivated by the size of it of the economy a nd the distance to the trade partners. (JEL F100, F170) THE gravitational force MODEL OF TRADE 3 The law of global gravitation was published by Isaac Newton as a widely distributed physical law.Its application was later on spread into various handle of research, succeeding to explain a series of scientific phenomena. In supranational economics, the gravity model of trade is used in post to name bilateral trade flows in respect to the economic performance (measured in gross domestic product) and distance between the two states taken into consideration. The present report aims to illustrate the gravity model of trade for the particular case of Japan, revealing how size and distance influence the countrys exports, centering the study on the relation among Japan and its 9 top trade partner countries.The model will be tested by estimating the parameters of the gravity equation, namely the elasticities for gross domestic product and distance. In order to estimate the gravity equati on, the R statistical package has been used. The data set contains information regarding exports, gross domestic product and distance to destination country, retrieved from the 2011 external Trade Statistics Yearbook of the fall in Nations. All data has 2011 as the socio-economic class of reference. The gross domestic product value for each country has been converted into billions of USD, in order to maintain the same unit of measure.Example chinas gross domestic product 2011 = 47. 16 trillion CN? exchange rate 1$ = 6. 4588 CN? then, chinawares GDP for 2011 amounts to 7,298,147 millions USD. Figure 1 shows Japans trade as office of the exports of the top-9 export destinations in 2011, versus the GDP as share of the total GDP reported by the top-9 export destinations. As it can be seen, China does a lot more trade with Japan than even with the U. S. A, the main reason being the small distance between the two states, which THE solemness MODEL OF TRADE reduces transportation c osts.In addition to this, the cultural factor has excessively to be taken 4 into consideration, as both Japan and China are Asian cultures sharing similar values and tastes therefore they deport a look-alike pattern of trade. The linear equation appears as it follows z = 12. 03 + 0. 05 x1 (-0. 15) x2 The coefficients of correlation in respect to GDP are b = 0. 05, therefore there is a weak relationship between trade and 1 countrys GDP. The coefficient of correlation in respect to distance is c=-0. 5, therefore there is also a weak relationship between trade and the distance between Japan and the trade partner country. The direct effect is that trade increases by 0. 05% when the partner countrys GDP increases by 1%, while it decreases by 0. 15% when the distance to the partner countries increases by 1%. The mean and the standard departure (descripted variables) have been computed for the variables GDP, exports, distance. GDP mean= 1556897. 3, standard deviation= 2417090. 79 Expo rts mean= 58211. 7, standard deviation= 52047. 57 Distance mean=4319060. , standard deviation= 3462913. 81 The results obtained depict that the model it is indeed verified, but the correlations are not strong bountiful in order to fully explain the patterns of trade between Japan and its 9 main trade-partners. Nevertheless, we can observe that both distance between countries and the size of one countrys economy are factors that influence the trade between two states. THE GRAVITY MODEL OF TRADE 5 References American Economic Association, JEL Classification Codes Guide. Retrieved October 6, 2012 from http//www. aeaweb. org/jel/guide/jel. hp Centre dEtudes Prospectives et dInformations foreignes (CEPII) (2011). Geodesic Distances. Retrieved on October 6, 2012 from http//www. cepii. fr/anglaisgraph/bdd/distances. htm International Monetary Fund. (2012). International monetary Statistics Yearbook 2012. Washington, DC International Monetary Fund Krugman, Obstfeld, and Melitz (2012), In ternational economics Theory &038 Policy, (9th edition), Pearson Education United Nations. (2011). 2011 International Trade Statistics Yearbook. New York United Nations. Retrieved on October 14, 2012 from http//comtrade. n. org/pb/CountryPagesNew. aspx? y=2011 United Nations Statistics Division, Countries or areas, codes and abbreviations. Retrieved October 15, 2012 from http//unstats. un. org/unsd/methods/m49/m49alpha. htm THE GRAVITY MODEL OF TRADE 6 Table 1 Japans Trade Partners Country Exports (millions USD) China USA Republic of Korea China, Hong Kong SAR Thailand Singapore Germany Malaysia Netherlands 162062. 1 127679. 0 66167. 5 42954. 4 37530. 60 27264. 60 23505. 50 18796. 00 17945. 80 GDP (millions USD) 7298147. 00 14660400. 00 1116247. 00 243666. 00 345672. 00 259849. 0 3607364. 00 287943. 00 838112. 00 2098111. 00 10855. 59 1156. 67 2891225. 00 4612997. 00 5326388. 00 9298341. 00 5329095. 00 9303377. 00 Distance (km) Source Data retrieved from the 2011 International Trad e Statistics Yearbook of the United Nations (2011 year of reference) Table 1 THE GRAVITY MODEL OF TRADE 7 Figure 1. Which are the closest trade partners for Japan? This figure illustrates Japans trade as percentage of the exports of the top-9 export destinations in 2011, versus the GDP as percentage of the total GDP reported by the top-9 export destinations.