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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View Full DocumentThe 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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 Fall '08
 Staff
 Monopolistic Competition, International Trade, Gravity Equation, Gravity term

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