In: Economics
Explain the use of the gravity model in international economics.
Gravity model is one among the highly used model for understanding trade flow between two nations. This model helps to understand some insights relating to the volume of trade flow between two economy. This model is useful in predicting the bilatetal flow of trade beween two nation which remains often in complexity due to barriers of iternational trade.
This model , being simplistic in nature gauges the cost of transportation and policy cost impacting international trade. This model helps to understand why two economes which are located in distant from each other may not have high volume of trade. Thus it helps policy makers to forecast the impact of trading in a nation would be beneficial or not. The use of this model is not only relating to trade or export but also helps to give insights to FDI policies that may turn out to be favourable. International trade has gained a huge importance since globalisation however every economy is different in terms of its size, population, growth, culture, political stability, tradition, linguistic group, thus understanding if it is favourable for a nation to trade with another nation requires extensive understanding of the other economies and also understand if trading with a nation would be profitable or not. This model clears out this doubt by predicting the interaction of the economies.
This model suggests that the more two nations are at distance from one another, the cost may rise up and hence it reduces the volume of interaction/trade.