The Gravity Model of Trade

THE GRAVITY good example OF share 1 Assignment 1 The Gravity Model Of job Do Size And Distance Matter For The Exports Of japan? THE GRAVITY imitate OF TRADE 2 Abstract In the field of international economics, the sedateness ideal for dispense reveals that symmetrical swap is directly proportional with the performance of the economy (usually expressed in gross domestic product) and inversely proportional with the geographical aloofness between the analysed entities. The present report illustrates the model for the case of japan, elaborating the make out patterns created among it and its 9 main trade partners.The parameters for the temperance equation atomic number 18 estimated and the recounting between GDP and merchandises for the countries in question are depicted through a scattered plot, for a more in-depth view on the connections. By interrogation the model it can be observed that the trade relations of Japan are being influenced by the size of it of the econom y and the exceed to the trade partners. (JEL F100, F170) THE GRAVITY homunculus OF TRADE 3 The law of universal sedateness was published by Isaac Newton as a general sensible law.Its application was later on spread into various fields of research, deliver the goods to explain a series of scientific phenomena. In international economics, the gravity model of trade is used in order to predict bilateral trade flows in respect to the economic performance (measured in GDP) and outer space 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 rudes exportings, centering the study on the relation among Japan and its 9 top trade partner countries.The model volition be tested by estimating the parameters of the gravity equation, namely the elasticities for GDP and distance. In order to estimate the gravity equation, the R statistical software ha s been used. The data set contains information regarding exports, GDP and distance to destination country, retrieved from the 2011 International employment Statistics yearbook of the United Nations. All data has 2011 as the year of reference. The GDP value for each country has been converted into billions of USD, in order to keep back the same unit of measure.Example Chinas GDP 2011 = 47. 16 meg CN? exchange rate 1$ = 6. 4588 CN? in that respectfore, Chinas GDP for 2011 amounts to 7,298,147 millions USD. aim 1 shows Japans trade as percentage of the exports of the top-9 export destinations in 2011, versus the GDP as percentage of the total GDP inform 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 author being the small distance between the two states, which THE GRAVITY specimen OF TRADE reduces transportation costs.In addition to this, the cultural factor has also to be taken 4 into considera tion, as both Japan and China are Asian cultures sharing similar values and tastes therefrom they have 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 one 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 convey and the standard deviation (descripted variables) have been computed for the variables GDP, exports, distance. GDP mean= 1556897. 3, standard deviation= 2417090. 79 Exports mean= 58211. 7, standard deviation= 52047. 57 Distance mean=4319060. , standard devia tion= 3462913. 81 The results obtained depict that the model it is indeed verified, but the correlations are not strong enough 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 Internationales (CEPII) (2011). geodesical Distances. Retrieved on October 6, 2012 from http//www. cepii. fr/anglaisgraph/bdd/distances. htm International Monetary Fund. (2012). International Financial Statistics Yearbook 2012. Washington, DC International Monetary Fund Krugman, Obstfeld, and Melitz (2012), International Economics possibleness & Policy, (9th edition), Pearson Education United Nations. (2011). 2011 International cover Statistics Yearbook. New York United Nations. Retrieved on October 14, 2012 from http//comtrade. n. org/pb/ countrifiedPagesNew. 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 Trade 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 describe by the top-9 export destinations.