Assignment 2 :

Test the Gravity Model of International Trade

The Gravity Model of International Trade is a theory that explains

the volume of trade between two countries based on their economic

size (GDP) and the distance between them. It's analogous to

Newton's law of universal gravitation, where the attraction between

two objects is proportional to their masses and inversely

proportional to the distance between them.

●​ The model suggests that trade between two countries is directly

proportional to the product of their GDPs (economic size) and

inversely proportional to the distance between them.

●​ In simpler terms, larger economies tend to trade more with each

other, and countries that are geographically closer tend to trade

 more.

Formula:

The basic Gravity Model formula is:

Trade Volume = (G * GDPy * GDPx) / Distance^s)

Where:

●​ Trade Volume: The value or quantity of goods and services traded

between the two countries.

●​ G: The gravitational constant, a proportionality factor.

●​ GDPy: The Gross Domestic Product of country i (e.g., India).

●​ GDPx: The Gross Domestic Product of country p (the trading

partner).

●​ Distance: The geographical distance between the two countries.

●​ s: An estimated parameter that represents the effect of distance on

 trade.

DATA COLLECTED:

India’s GDP (in 2023-2024) : 3.7 trillion USD

Country Trade GDP (in Distance ( in GDPy

Volume Trillion $) km) *GDPx
(in Billion $)

France 13.33 3.039 6590 11.2443

UK 40.9 3.34 6704 12.358
Japan 22.85 4.32 5,830 15.984
Canada 9.36 2.511 11,332 9.2907

Italy 14.34 2.25 6578 8.325

Impact of Distance and GDP on Trade Volume: Analyzing

India's Trade Partners

1. The Effect of Distance on Trade Volume

The Gravity Model of Trade suggests that greater distances between

countries reduce trade volumes due to higher transportation costs,

tariffs, and logistical barriers. Based on the data:

●​ Japan (5,830 km) has a high trade volume of $22.85 billion, likely

because of strong trade agreements and industrial demand.

●​ France (6,590 km) and the UK (6,704 km) have moderate trade

volumes ($13.33B and $40.9B, respectively).

●​ Canada (11,332 km) has the lowest trade volume ($9.36 billion),

despite a strong economy, likely due to the significant shipping

costs and geographical distance.

●​ Italy (6,578 km) has a trade volume of $14.34 billion, which follows

the general trend of moderate trade at mid-range distances.

This trend confirms that farther distances often result in lower trade

volumes due to higher transportation costs and longer supply chains.

However, historical ties, trade agreements, and economic

complementarity can override this effect (as seen with the UK and

Japan).
2. The Effect of GDP on Trade Volume

Larger economies tend to trade more due to their greater market size,

higher production capacity, and stronger demand for imports/exports.

●​ The UK (GDP: $3.34T) and Japan (GDP: $4.32T) have some of

the highest trade volumes ($40.9B and $22.85B, respectively),

aligning with their strong economies.

●​ France (GDP: $3.039T) and Italy (GDP: $2.25T) show moderate

trade volumes ($13.33B and $14.34B), suggesting a positive

GDP-trade relationship.

●​ Canada (GDP: $2.511T) has lower trade with India ($9.36B), likely

due to its distance and alternative trade partners (such as the

U.S.).

This analysis supports the Gravity Model: higher GDPs correspond to

higher trade volumes, since wealthier countries have greater import and

export capacities.
 ●​ Distance negatively affects trade volume, as seen with Canada

having the lowest trade volume despite a strong economy.

●​ Larger GDPs encourage higher trade, as observed with the UK

and Japan, which trade heavily with India.

●​ Other factors, such as trade agreements, historical ties, and

specific industry needs, also play a crucial role (e.g., India's trade

with Japan is strong due to technology and automobile sectors).

GRAPHICAL REPRESENTATION
Analysis of Patterns in the Scatter Plots and Relation to

the Gravity Model of Trade

The Gravity Model of Trade suggests that trade volume between two

countries is positively correlated with their economic size (GDP) and

negatively correlated with the distance between them. Let's analyze how

these factors play out in the scatter plots:

 1. Trade Volume vs. Distance Scatter Plot

●​ Trend: There is an inverse relationship between distance and trade

volume. Countries closer to India (such as Japan and France)

generally have higher trade volumes compared to countries that

are farther away (such as Canada).

●​ Impact of Distance:

○​ Countries with greater distances, like Canada (11,332 km),

tend to have lower trade volumes due to increased

transportation costs, tariffs, and logistical challenges.

○​ Countries with shorter distances, like Japan (5,830 km), tend

to trade more with India, likely due to lower shipping costs

and better trade connectivity.

●​ Exceptions:

○​ The UK has a relatively large trade volume despite being far

from India (6,704 km). This could be due to strong historical

trade ties, trade agreements, and a well-established

 economic relationship.

2. Trade Volume vs. GDP Product Scatter Plot

●​ Trend: A positive relationship exists between the GDP product

(India’s GDP * Partner’s GDP) and trade volume, meaning that

richer countries tend to trade more.

●​ Impact of GDP:

○​ Japan, which has the highest GDP product with India

(15.984), also has a relatively high trade volume ($22.85

billion).

○​ The UK has a high GDP product (12.358) and the highest

trade volume ($40.9 billion), reinforcing the idea that larger

economies trade more.

○​ Canada, despite having a moderate GDP product (9.2907),

has a low trade volume, likely due to its long distance from

India.
●​ Exceptions:

○​ Italy and France, despite having lower GDP products, still

have significant trade volumes. This suggests that factors

like trade agreements, historical trade relations, and

sector-specific trade (such as luxury goods, automobiles,

and defense) may influence trade beyond just GDP size.

Final Conclusion: How the Patterns Support the Gravity Model

●​ Distance matters: The farther a country is from India, the lower the

trade volume, which aligns with the Gravity Model's prediction that

transportation costs and trade barriers increase with distance.

●​ GDP matters: Larger economies trade more, as they have higher

production and consumption capacities. Countries with high GDP

products (India * Partner GDP) tend to have greater trade

volumes.

●​ Other factors: While the Gravity Model provides a strong

 framework, other factors such as historical ties, trade agreements,

and industry-specific trade (like technology, automobiles, and

energy) also influence trade volume.

Thus, the scatter plots validate the Gravity Model while also highlighting

additional complexities in international trade relationships.