The top 5 destinations for canadas exports are us 76

The top 5 destinations for Canada’s exports are: US (76%), China, UK, Japan,
Mexico. For South Korea, they are: China (25%), US, Hong Kong, Vietnam, and
Japan. The gravity equation is in the form:
T
ij
= A
Y
i
× Y
j
D
ij
.
or in log-linear regression form:
ln( T
ij
) = β
0
+ β
1
ln( Y
i
) + β
2
ln( Y
j
) + β
3
ln( D
ij
) + ε
ij
The gravity equation or model tries to explain bilateral trade flows based on the
economic size of the two countries and the geographic distance between them.
Suppose i is Home country (i.e., either Canada or Korea), and j is the Foreign
country (e.g., US). Since US is the largest economy in the world, Y
j
is large.
Since the distance between Canada and US is small, D
ij
is small as well. The
gravity equation thus predicts that bilateral trade flows between Canada and US
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would be large. For Korea, although US is still a large market to trade with,
D
ij
between Korea and US is large, so T
ij
would not be as large. Applying this
reasoning to China and the rest of Asia can explain why Korea’s exports are more
diversified. Another major factor is the free trade agreement between Canada,
US, and Mexico (NAFTA), which lowers trade costs. Economists have also found
that sharing a border promotes trade, as well as having stronger cultural ties
such as a common language.
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