The Gravity Equation and Cost of Trade

Video 6 of 61 from the course: International Trade

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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