The paper 'Gravity Models and Trade Flows' is a wonderful example of a Macro and Microeconomics Essay. Gravity models are useful tools that analysts use to study a wide range of patterns and behaviors within the social sciences. Experts normally use the models to analyze the behavior that shows similarities to the laws of gravity that Isaac Newton developed. Ravenstein was the first person to use gravity models, doing so in 1884 to explain migration in the United Kingdom. Almost a century later, Tinbergen became the first person to apply a gravity model in economics.
The use of gravity models to analyze trade has enabled experts to predict trade flows between multiple units based on a number of variables. Through this analysis, policymakers have been able to understand the impacts of different treaties signed in the international arena, as well as the effectiveness of international trade organizations such as the WTO (World Trade Organization). In the article, Gravity with gravitas: A solution to the border puzzle, Anderson and Van Wincoop argue that the lack of theoretical perspectives in the empirical models leads to various shortcomings within them.
The authors develop a different model that is theoretical in nature and factors in variables that economists had previously failed to consider. For the new model, Anderson and van Wincoop draw most of their ideas from work McCallum’ s research, which compared intra-national trade between provinces in Canada with international trade between Canadian provinces and the American States. The theoretical gravity model that Anderson and Van Wincoop developed is better than the traditional empirical model because it uses a holistic approach that covers all of the important variables involved. The Anderson and van Wincoop Model For the traditional gravity model, analysts derived equations from Isaac Newton’ s law of universal gravitation.
When applied to economics and international trade, the law implies that goods and labor from one point of origin are drawn to the demand for them at a specific destination (Salvatici, 2013, p. 3). However, a number of factors influence the movement of the goods and labor to a specific destination with distance being one of them. In addition to these omissions, analysts have faulted the models for failing to embed any real theoretical explanations.
For this reason, Anderson and Van Wincoop resorted to the development of a new model that would place some emphasis on theoretical aspects. In their analysis of gravity models, Anderson and Van Wincoop (2003, p. 170) start by explaining that the equations have been quite successful in explaining various economic issues. Analysts can use these equations to connect bilateral trade flows to a number of important variables such as GDP (Gross Domestic Product) and distance. However, the authors are quick to state that the empirical equations that analysts have been using lack the necessary theoretical perspectives (Anderson and van Wincoop, 2003, p.
170). One theoretical issue lacking in the gravity models relates to multilateral resistance. In the equations, analysts make the incorrect assumption that the only real barrier to bilateral trade is distance and this makes the equations lack substance. In addition to this, Anderson and Van Wincoop (2003, p. 170) find two faults in the empirical gravity models. Firstly, the results that the models estimate are biased because the equations fail to take into account some variables.
The second fault is that the models carry out comparative statics exercises something that the authors claim is not as straightforward as the equations make it look like it is (Anderson and van Wincoop, 2003, p. 170).
Anderson, JE & van Wincoop, E 2003. ‘Gravity with gravitas: A solution to the border puzzle’, The American Economic Review, vol 93, No. 1. Pp. 170-192.
Behar, A & Criville, LC 2010, ‘The impact of North-South and South-South trade agreements on bilateral trade’, CSAE Working Paper, 2010-30.
Behar, A & Nelson, BD 2009. ‘How multilateral resistance and firm heterogeneity affect trade elasticities’, Leverhulme Centre for Research on Globalisation and Economic Policy, Nottingham University.
Salvatici, L 2013. ‘The gravity model in international trade’, AGRODEP, vol. 04, pp. 3-24.