Lesson 2 - Part 1: The Gravity Model

[@ProfBoggs]

Love the example and sketch of the GPS-enabled dog!

[@Davidjhebertecon]

It was a pretty fun one when my friend told me about it! Thanks so much!

[@joun7665]

Thank you so much for this video that makes me understand clearly about Gravity model of trade because I am going to begin doing my thesis about trade on September

[@Davidjhebertecon]

Glad that you found it helpful! Feel free to reach out to me if you have any further questions or if I can help you out with your thesis! [e-mail]

[@elekwapaul8068]

can I get the original theory and version of Tinbergen?

[@Davidjhebertecon]

Well, it sounds like you've done a bit of homework on your own, as I don't recall mentioning Tinbergen (or Isard) in the video anywhere :) I'm sure you can find something most relevant to your purposes/interests on Google. Let me know if I can help at all!

[@godwinkatemi5157]

Thanks Prof

[@mangguodaren7366]

Before watching your video, I would like to thank you first.

[@Davidjhebertecon]

Hopefully you thank me after having watched it, too! :)

[@fuzhufeifei]

Dear and respected Professor Dave, I still have 1 question for you. For international trade, I read one A journal paper which applied gravity model. I also read a few papers related to FDI. Although all those papers said that they are using gravity model (for example, including a set of standard explanatory variables), actually, the forms of their models are very normal, namely, at the left side of the model, it is dependent/focused variable while on the right side, there are a lot of other explanatory and control variables. Regarding the third country effect, researchers put spatial autoregression term. Because of those modifcations, I don't know whether we can still consider those models as gravity models or we should just look at them as normal regression models.

[@Davidjhebertecon]

Hi Cherry! So sorry for the delay in getting back to you. I think we can still count those as "gravity models." The gravity model isn't really limited to JUST this. Really, as long as the model takes on the functional form of this one, it's a gravity model. The other variables on the right hand side are just control variables that are included to try to isolate the relative sizes of the economies and their distances apart.

[@leemanu94]

Great video that helped me understand the gravity model! I have two questions two. 1: can you replace GDP by trade in a particular good (e.g. car trade) 2: the theory gives the theoretical trade without the impediments barriers and borders, but can you model those into the formula? I ask because my dissertation will handle Brexit and future (Belgian) car trade and I will use of a gravity model for long term impacts.

[@Davidjhebertecon]

First, thank you for your comment! As to your question, I'd be hesitant to do that. For example, let's say that you were looking at iPhones. The US is the only country that produces iPhones (despite the obvious global supply chain in production, it all counts as US production for the final good). If you were to apply the gravity model to this, you'd predict that there would be zero trade between the US and all other countries, which is obviously untrue. I think a better approach would be to use GDP to approximate the A-term in 1957 (the year before the EU was formed) and then approximate it again for 2014 (the last year when there wasn't at least rumblings about Brexit). You can then apply the 1957 A term to today's world as a sort of "this is a sort of worst-case-scenario of what could happen because of Brexit." I like this approach because, if all the proponents of the EU are right (and I have no reason to suspect that they're not), then we should see an increase in A as a result of the European Union, which captures one measure of the "benefit" of being an EU member. Unfortunately, the KZbin comments section precludes me from using formatting to better explain this. If this is unclear, feel free to send me an email ([e-mail]) and I'll send you back a word document or something that explains this all a little clearer.

[@Davidjhebertecon]

To your second question, it's not *really* accurate to say that the model talks about a theoretical volume of trade with *zero* barriers/border considerations. It's more accurate to view this as giving us a measure of typical countries with typical policies and typical border considerations. For example, let's say that the average tariff rate across all countries is 10% (in the real world, it's almost certainly much lower). The model would give us a theoretical limit for the volume of trade between countries assuming that they had this 10% tariff rate. If we observed more trade between the countries than this model predicts, then it's likely that that those countries have tariff rates less than 10%. If we see less trade than the model predicts, then we'd expect to find that they have tariff rates greater than 10%. I'm getting more nuanced here because you're trying to do things with this in the real world and you're a graduate student who can handle the nuance. In the classroom for undergrads, we can sort of hand-wave this stuff away as being inconsequential.

[@fuzhufeifei]

Thanks very much dear and respected Professor. This video is very helpful. I have 3 questions for Professor. 1.What is the validity to apply Newton's Law of Universal Gravity in economics subject? 2. The limitation of gravity model in international trade is that it does not consider the third country/region effect. Thus, with the rapid development of globalisation, is such model still useful to explain and predict international trade? 3. I asked a person who is working in a company which is located in the eastern part of China. He mentioned that the distance does not really affect their business. The cost of transporting wood by shipping from Africa is chaper than that by land from Xinjiang, China. Therefore, distance might not be an important element when we consider about international trade now. If this point was true based on further regression tests, gravity model would become less applicable. How does Professor look at this point?

[@Davidjhebertecon]

Hi Cherry! First, thank you so much for watching my videos and for your comment (and hopefully liking and subscribing! :) ). I'll go through your questions one by one. 1) A lot of economics models are actually "based off" of models of ballistics, so we've taken a lot of cues from Newtonian physics. In terms of the applicability of physics to economics, I think it's important to stress that economic models such as these are not meant to give us precise point predictions of what, exactly, will happen but instead are meant to help us make pattern predictions, i.e. should we expect the volume of trade to increase or decrease as opposed to "by exactly how much will the volume of trade increase or decrease." See my video from a different class on economic models here: kzbin.info/www/bejne/d5angmWulpeJjMU 2) There are definitely major limitations to the gravity model and you've identified a major one, so nicely done! That being said, it's a useful place to start thinking about international trade, which is why it's the first model presented in this class. There are definitely more complex models of international trade that take far more factors into consideration than just GDP and distance, but here's how I would think about it: you want to use the simplest model that you can when working with data. If the gravity model works for your particular example, great! If it doesn't, then you've identified an "anomaly" which tells you to look more closely at the two countries for some sort of context-specific factor that's influencing their volume of trade. Once you've identified what that is, you can then use that information to help you select a more appropriate model. 3) I have no reason to doubt your friend's insights - there likely are particular goods where distance is not as relevant as the gravity model suggests. But at the same time, there are probably other goods where distance is incredibly important. When we use GDP, we're basically averaging across ALL goods that countries produce/trade, so while I'm not surprised that distance is less relevant for particular goods, I'd be very surprised if distance was irrelevant "on average" or "in the aggregate." Do those help? Again, thank you so much for your comment! -Dave

[@fuzhufeifei]

Thanks a million, dear and respected Professor Dave. Your reply indeed has increased me in knowledge. It is very helpful. It opened my eyes. There are many points and thoughts that I never learned or heard before. Thanks very much! May you have a blessed day.

[@wisdomoguike3728]

Please can i get a comprehensive material on gravity model pros and cons

[@ProfBoggs]

@@Davidjhebertecon I think one way to deal with the case of wood being cheaper to ship from Africa than within China might be captured by replacing the Dij measured in kilometers from some central point to Dij measured in mean shipping costs between two locations in RMB, USD or what have you. Getting that data, though, might be difficult. The wood is likely cheaper to ship due to the low cost of shipping bulk goods over water than over roads or rail.

[@Davidjhebertecon]

@@ProfBoggs Thanks so much for the comment! You raise a lot of very good points regarding different means of shipping. I've seen some attempts to get around this by replacing "distance" with some measure of "shipping costs" to try to account for different shipping methods. I've also seen some attempts to get more granular with "distance." For example, I'm currently in the state of Michigan in the United States, which is very very close to some parts of Canada but also very very far from other parts. If we were to analyze trade between Michigan and Canada, would we use the very very close measure or the very very far measure? It's hard to say, even in this small example, so doing it across an entire country is incredibly complex. In the end, as i stated somewhere in one of these videos/comments, the gravity model is a fine place to start, but it's certainly not a be-all-end-all model and I would strongly urge people to use other models instead for more accurate understandings of international trade.

[@gulzirashalgymbayeva478]

Thank you so much

[@Davidjhebertecon]

You're welcome! Thanks for checking out my channel. I hope you take the time to check out some of my new videos, too!

[@ethemarslan5008]

thanks. it is very helpfull.

[@Davidjhebertecon]

Thanks for watching! I hope you take the time to check out some of my other videos, too!