Describe the gravity model – specify the variables, use an example of Canada and the USA, or Mexico and the USA.

Home, - Predict trade flows between two countries

Question: The Gravity Model

"The gravity model of international trade is able to predict trade flows between two countries based on two principal factors."

Describe the gravity model - specify the variables, use an example of Canada and the USA, or Mexico and the USA - both situations where the gravity model has been found to be accurate.

The gravity model is defined as the international trade flow in the international economic concept to predict bilateral trade projection. Based on geographical distance and economic sizes between two countries, the bilateral trade flow can be measured. The key implication of the model in the international trade perspective is the determination of major and minor factors to maximize the economic up-gradation process of two cities. The relevant economic size enhances the recent GDP structure, economic proximity, and economic growth history, and present status of the country (Shahriar et al., 2019, p32(4)). With the help of the model, the economic size motivates the countries to create a trade relationship with each other while the greater distance issues can weaken the trade attractiveness. Two variables of this model are relative economic size and geographical distance between two countries.

Both the United States and Canada are considered as each other's largest trading partners. Canada imported approximately C$215 billion of merchandise from the USA in 1999, which is estimated by approx ? rd of Canadian trade imports and 23% of total US trade exports. In 1999, Canada also exported C$286 billion of merchandise to the US, accounting approx 83% of total Canadian trade exports and 19% of total trade imports in the USA (Bouët and Laborde, 2018, p2278(4)). The trade volume rate is not surprising at all as both countries shared similar cultures and economic attributes. Being an exclusive relationship between the countries, Canada is recognized as the second-largest trading partner having $612.1 billion in good merchandising in 2019. The good trade deficit in the USA was $26.8 billion in 2019 (Itakura, 2020, p78(2)).

On the other hand, Mexico was the fifth largest trading partner of the USA in 2012. The USA signed a free Trade Act with Mexico and Canada in 1994 as per North America Trade Agreement policies. Like Mexico and Canada, both are closest to the USA, the excellent trade relationship has improved the GDP status of the USA, Mexico, and Canada. Goods imported in Mexico in 2019 were considered as a $614.5 billion good trading partner with the USA. Total imported goods were $358 billion while exported goods amount was $256.6 billion. The good trade deficit in the USA in 2019 was $101.4 billion. After analyzing the comparison, it has been discovered that the gravity model is more accurate and profitable in Mexico while creating a trading partnership with the USA.

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