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Very basic: constant in gravity-model of trade

  1. Oct 21, 2013 #1

    939

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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?
     
    Last edited: Oct 21, 2013
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  3. Oct 21, 2013 #2

    tiny-tim

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    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:
     
  4. Oct 21, 2013 #3

    939

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    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 :-/
     
  5. Oct 21, 2013 #4

    tiny-tim

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    i don't understand :confused:

    can you give an example?​
     
  6. Oct 21, 2013 #5

    Nugatory

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    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.
     
  7. Oct 21, 2013 #6

    SteamKing

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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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