welcome to the next installment my video lecture series for international economics and in this particular video lecture I'm going to be taking a look at something that appears in chapter two of your textbook and it's the gravity model and in particular I want you to be aware of the origins and it its Origins actually were the reason why it's called the gravity models its Origins lie in Newton's law of universal gravitation and in that we have that the force of attraction between two bodies I and J and let's assume that I is equal to the Earth and J is the moon is equal to a gravitational constant and it is equal to the mass of the Earth multiplied by the mass of the Moon divided by the square of the distance between the Earth and the moon so this is what basically what is saying is that the force of attraction between two objects is related to the mass of the two items but inversely related to the distance of the two objects that we're talking about so more massive objects attract each other more but if the distance between those two grows that force of attraction decreases this was adapted by Yan tinbergen who uses basically the same exact form and to model international trade I believe this comes from roughly 1962 and also realize it's been adapted to a whole range of different interactions between countries migration tourism foreign direct in investment Etc so this functional form has been used and adapted to model numerous types of interactions that occur across International boundaries and the gravity model of international trade as you can see looks very similar more so we have t sub i j so this is the level of trade between country I and J realize that this could be done two different ways this could be the flow of trade from country I to Country J so for example if we were to assume that the United States is I and Canada is J you could use this to model the amount of trade from the United States to Canada so you can think of it as a one way flow of trade or alternately could be used to model the flow of trade in both directions I.E the flow of trade from the US to Canada and then the flow of trade to the uh from Canada to the United States so it could be it could model both of those simultaneously so the level of trade between two countries is equal to a constant and it is directly proportional to the level of GDP and Country I in our example that I just gave in the United States and the level of GDP in country J which is Canada but is inversely related to the distance between the two countries so what this is basically saying just like the gravity model larger countries in terms of GDP are more likely to engage in trade with one another but that level of trade decreases the further the distance between the two countries now if you take a look at this you'll see we have uh you know the uh GDP of country I to the power of a and the GDP of country J to the power of B and the distance to the power of C please note that for most research that is done these a b and c end up being estimated at roughly equal to one A and B are found most of the time to be between 7 and 1.1 I believe and C generally is always is estimated to be roughly around one so realize that we can get rid of these if we assume that A B and C are equal to one we get to the form uh that is in the textbook realize that these are the same they're just written a little bit differently I wanted to make sure that this was written in the same form that appeared in the textbook so trade is directly proportional to a constant the GDP of both countries and inversely related to the distance between those two countries so as the GDP of countries increases the level of trade should increase but as the distance between countries increases the level of trade between the two should decrease so why is distance so important make sure you realize that distance can act as a very good proxy for transportation cost realize that we're just talking about trade coming from the United States to another country or to countries we don't know exactly how far each of those transactions actually took place so we don't know that something originated in New Jersey and went to the Netherlands and versus something that originated in Kansas City and ended up in the Netherlands so we use the distance between the two countries as a proxy for the distance as the distance and we also recognize that this gives us a good indication of relatively the transportation cost between the two countries could be also realize that distance indicates that there's a time in shipment and then the longer the shipment time is the greater the risk of that transaction for example that shipment could be damaged or lost in transit so for example you could have something on a ship and it sinks and disappears or they could go through through a storm and a portion of the things that you're shipping to from the United States to the Netherlands or from the Netherlands to the United States get damaged in transit so there's a risk involved and the high the longer the distance the greater the risk of shipping also if you're sending items that are perishable Goods this leads to a higher risk of decomposition and spoilage so if you're shipping perishable items from the Netherlands to the United States the longer it takes the more likely that it's going to decompose or spoil in transit therefore there's going to be a higher level of risk and finally realize that distance impedes communication and some people refer to this as transaction cost now you will realize that with changes in communication technology face-to-face trans uh transactions don't occur as frequently but there are still some Industries where face-to-face transactions are very very important so that's an important thing to realize that even though we have uh you know email and video conferencing the fact that you some transactions it's still important to meet with somebody face Toof face in the process uh leads to the fact that the further away you are increases those type of Transportation costs also I forgot for the second bullet point that what occurs is that you during the these longer distances the market can change during Transit so if it takes three months for something to get from point A to point B that market May longer exist or the market might have changed completely so by the time that you ship those products to a particular Market the price that you expected to receive might be completely different than the actual price also the distance make sure you realize too that there are could be cultural differences generally the further countries are away from one another they vary drastically culturally if you ever get to travel overseas or to go another to another country particularly if you go to Europe or go to China or India the cultures are very different and the way transactions occur are very different so the distance could also be an indicator of any cultural differences that might actually exist that might impede tra uh trade between two countries that are further and further away from one another also realize that that this gravity model in itself is not perfect that there are certain augmentations or changes that individuals make in order to try and improve the model what I often times refer to this is that that particular gravity model is a a recipe but the recipe can be adapted uh to account for other things for example per capita income is often times used instead of GDP just taking GDP and divide it by the population the rationale for this is that in general the higher the level of per GDP per capita GDP the higher the level of trade also wealthier countries have a to have better infrastructure better roads better airport facilities better Portage facilities Etc so that would indicate lower transaction costs for international trade also the fact it's referred to here is adjacency but the fact that you're right next to another country all right the fact that United States shares a border with Canada the United States shares a border with Mexico that's an important component that is often times included in models uh using the gravity model and an addition to an augmentation to the gravity model also the fact that there can be language issues and SLC Colonial links for example what I like to talk about with this one the colonial links that in the United States even after the Revolutionary War all right we fought to gain independence from Great Britain After the Revolutionary War we still engaged in trade with Great Britain even though we had fought a war with them there were the colonial links and there were preexisting trade that was going on and we shared a Common Language with them so it made it easier to engage in trade than it would be to develop those trade routes with other individuals and also border effects there are still border effects even though there's free trade is getting easier and easier I shouldn't say easier easier but trade is freeing up and there are fewer restrictions for international trade the impact of crossing a border still is there for example you can look at items that get shipped within Canada let's say a th000 miles in Canada versus a th000 miles into the United States and across the border that that type of trade will less likely to occur even though the distance is exactly the same because the borderers still physically exist and there still might be impediments that occur because of that border for the language part in the Border effects I often times like to bring up Belgium the country of Belgium as an example if you take a look at Belgium you will see that it is surrounded by three very large economies France the Netherlands and Germany it is also shares a border with Luxembourg but Lu Berg is a very small country but it has a very high per capita income so it would be important probably to include that if you were in doing per capita income the fact that it borders Luxembourg so it has some very large economies that it borders and it if you take a look at Belgium I believe that 90% of its GDP is exported to other countries so it has the Border effect that occurs because it borders I mean the adjacency effect because it has it shares borders with those large economies and because of the European Union the the Border effects that used to exist Crossing in other borders don't occur anymore additionally Belgium shares languages with the Netherlands France and a portion of Germany uh Belgium the Flemish part of the country they speak Flemish which is a dialect of Dutch uh if if there if you know any Flemish speakers they will probably vly deny that it is a uh dialect of Dutch but they are very similar for example if you learn to speak Dutch you will be understood in the Flemish speaking part of uh Belgium But realize because they share that border they and they share the border and they share a language that's going to facilitate trade between them there's a portion of Belgium that's speaks French or the w woni section or wallonia they speak woni uh which some people to be considered a dialect of French if you speak French you you'll be pretty well understood in won in uh Bonia in in Belgium so they share a language so it would be easy to engage in trade with them also one of the things that helps to explain why Belgium has such a high inter level of international trade is it has the second largest port in Europe antor is a large Port facility and it gives them the advantage in shipping things over the ocean they have a it's an excellent Portage facility I've been to antp on a number of occasions in my life and it's a huge impressive Port it gives them the advantage in transportation cost so just make sure you realize that not only do we have the gravity model but the little tweaks that can be made to improve the predictive capabilities of the gravity model