Question

Do you understand the gravity model as it relates to the recent increase in East Asian trade?

Answer 1

In economics, the gravity model of global trade refers to a model that predicts bilateral trade flows based on the distance and economic sizes among two units. The model makes an assumption that the trade volume among two economies will be directly proportional to the economic masses of product (measured in terms of gross domestic product or gross national product) and inversely proportional to the distance among them

Thus when share of global GDP which belongs to East Asian economies grows high, then their trade relationship with other countries also grows in size; and consequently the relationships of trade with East Asian countries increases over time. When economy turns wealthier and the consumption demands of their populace increases, then there will be more imports. Earlier they had focused their exports to other rich countries, however with passage of time they became part of the rich country club and therefore become targets for one another’s exports. For instance when South Korea and Taiwan were both small and the product of their GDPs was not high which means that despite their proximity, there was little trade among them. However when both countries have grown considerably, then using the gravity model their GDPs expects a considerable amount of trade