Very basic: constant in gravity-model of trade

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Discussion Overview

The discussion revolves around the concept of the "constant" in the gravity model of trade, which posits that trade between countries is influenced by the size of their economies and the distance separating them. Participants explore the significance of the constant G in the formula Trade = G ((Mi*Mj)/(Distance)) and its implications for trade calculations.

Discussion Character

  • Conceptual clarification
  • Debate/contested

Main Points Raised

  • One participant seeks clarification on the meaning of the term "constant" in the context of the gravity model of trade.
  • Another participant explains that "constant" indicates the same value of G is used in all cases, regardless of the countries or distance involved.
  • A participant questions the necessity of including G in the formula, suggesting that the ratios of trade values would remain the same regardless of G's value.
  • Another participant responds that while G can be omitted for ratio comparisons, it is important for determining the actual numerical value of trade between economies.
  • A later reply humorously suggests that the author of the trade law may have been influenced by physics, implying a desire to apply physical laws to economics.

Areas of Agreement / Disagreement

Participants express differing views on the necessity and role of the constant G in the gravity model of trade. There is no consensus on whether G should be included in the formula or its significance in trade calculations.

Contextual Notes

Some participants highlight the potential for confusion regarding the role of G, particularly in relation to trade ratios versus actual trade values. The discussion does not resolve these uncertainties.

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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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