This video covers the "gravity equation," which explains that if two countries are far apart geographically, the trade between those countries decreases. Natural
This video covers the "gravity equation," which explains that if two countries are far apart geographically, the trade between those countries decreases. Natural trading partners tend to be the countries closest to each other, even if neighboring economies are significantly smaller. For instance, Canada and Mexico trade the most with the United States. This video also discusses what contributes to the cost of trade across borders for developed countries — and you may be surprised to find that tariffs present a relatively small barrier to trade in comparison with other barriers in language, currency, information costs, security, and policy.
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Very good video. Do more elaborate models of the equation include a sort of n-body consideration for the number of local nations? And are there recursive models of the equation that incorporate adjustments to some of the more elastic/flexible factors like language?
I think that the examples are provided to justify an empirical formula. Let's take a comparison between Australia - New Zealand and Australia-China today. The trade Australia-China would be at least 10 times larger than Australia-NZ in spite of the fact that China is more than 5 times farther than NZ. There should be other factors to take into account in addition to size of economies and distances. Such are cost of labor, raw materials needs, innovation, military equipment sales, etc. I guess things are much more complex than presented.