Class18_Gravity

# Class18_Gravity - Empirical Applications of Monopolistic...

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Empirical Applications of Monopolistic Competition and Trade Deriving the Gravity Equation Exports from Country 1 to Country 2 will equal the goods available in Country 1 times the relative size of country 2, divided by the transportation costs: Trade = GDP 1 Share 2 dist n = 1 GDP W " # \$ % ' GDP 1 GDP 2 dist n Notice this looks similar to Newton’s gravity equation. 1/GDP W is the constant term. Distance here is physical. But it could also be conceptual, capturing any barrier to trade.

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The Gravity Equation for Canada and the United States Figure 6.9 shows data collected on the value of trade between Canadian provinces and the U.S. states in 1993. An exponent of 1.25 is used on the distance variable based on other research studies. The horizontal axis is the gravity equation on a logarithmic scale. The higher the value means either a large GDP for the trading province and state or a smaller distance between them The vertical axis shows the 1993 value of exports between a Canadian province and U.S. state or vice versa.
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Class18_Gravity - Empirical Applications of Monopolistic...

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