Very basic: constant in gravity-model of trade

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SUMMARY

The gravity model of trade quantitatively describes trade flows between countries based on their economic sizes and the distance separating them. The formula Trade = G ((Mi*Mj)/(Distance)) incorporates a constant G, which remains the same across all calculations, indicating its universal application regardless of the countries involved. The discussion clarifies that while G can be omitted when focusing on ratios, it is essential for determining absolute trade values. This model reflects an attempt to apply physical laws to economic theories, highlighting the interdisciplinary nature of economic analysis.

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  • Understanding of the gravity model of trade
  • Familiarity with economic terminology such as "economy size" and "trade flows"
  • Basic knowledge of mathematical formulas and constants
  • Awareness of the relationship between distance and trade volume
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Economists, trade analysts, students of international trade, and anyone interested in the quantitative analysis of trade relationships between countries.

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Very basic: "constant" in gravity-model of trade

The gravity model of trade states that trade between countries depends on the size of their economies (bigger = more trade) and distance between them (larger = less trade).

The formula is: Trade = G ((Mi*Mj)/(Distance))

Mi is size of economy i, and Mj is size of economy j, and G is a "constant". I am seeing this term, "constant" used more and more in Economics. Can someone tell me what exactly it means, especially in a formula like this?
 
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hi 939! :smile:
939 said:
… I am seeing this term, "constant" used more and more in Economics. Can someone tell me what exactly it means, especially in a formula like this?

"constant" means that we use the same value of G in all cases

it doesn't matter which two countries it is, or how far apart they are …

the same formula always works, with the same value of G :wink:​
 
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tiny-tim said:
hi 939! :smile:


"constant" means that we use the same value of G in all cases

it doesn't matter which two countries it is, or how far apart they are …

the same formula always works, with the same value of G :wink:​

Thanks.

The only thing I don't get is why bother even putting G there? If there's two answers from the calculation, 3/2 and 1/2, they'll have the same ratio regardless of what constant G is, no?? In that sense you could just leave out the G all together :-/
 
939 said:
If there's two answers from the calculation, 3/2 and 1/2, they'll have the same ratio r…

i don't understand :confused: …

can you give an example?​
 
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939 said:
Thanks.

The only thing I don't get is why bother even putting G there? If there's two answers from the calculation, 3/2 and 1/2, they'll have the same ratio regardless of what constant G is, no?? In that sense you could just leave out the G all together :-/

You can, but we might be interested in the numerical value of the trade instead of just how it compares with the trade between two other economies. Of course if I know the value of the trade between one pair of economies of known size and separation, I can use the ratios to work out the value for any other pair - but that's basically equivalent to calculating the value of G.
 
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I think the author of this 'trade law' was a frustrated physicist. Now, he is trying to develop a new 'System of the World' by reformulating economics in terms of various laws like physics has.
 

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