Chapter 2 (Who trades with whom?)

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Gravity Model of Trade

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Gravity Model of Trade

Bilateral trade is a function of distance, population and the size of two countries' economies.

  • Simply richer, more populous countries buy more and transaction costs are a function of distance.

  • Only predicts total flows, not what is traded

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Gravity Model of Trade - equation

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What are impediments to trade?

Distance, trade barriers, and borders

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