Answer to Question #304783 in Macroeconomics for nnn

Question

Does the trade between the United States and Brazil and Argentina follow the prediction of the gravity model? Discuss on the basis of trade figures and their determinants.

Answer 1

The gravity model is normally used to describe the bilateral trade flows which are influenced by the Gross Domestic Product (GDP) per capita, population, and even the distance. This makes trade flows between countries to be positively connected to their economic size and population.

There has been a strong influence on trade policy by economists since they make compelling arguments for free trade and lower trade barriers in all the three mentioned countries, hence mirroring the predictions of the gravity model. Gravity model trade between the United States and Brazil and Argentina follows the Gravity prediction, where it shows the trade between the three countries which is proportional and equal to the product of the three countries' GDPs. The trade has been growing significantly slower than an import partner's income, thus suggesting that these emerging economies are more likely to have the most successful trades with other developing countries than with more developed countries. The effect depicted here has proven itself for a large number of countries with different cultural, geographical, and economical backgrounds. In these three countries, the trade drivers include a variety of factors trading conditions like changes in supply or demand and payment policies.