The gravity model predicts trade patterns based on
A. factor endowments.
B. labor productivity.
C. trade policies in place.
D. economic size and distance.
The correct answer and explanation is:
The correct answer is D. economic size and distance.
The gravity model of trade is a well-known theory in international economics that predicts trade flows between two countries based on their economic size and the distance between them. It is called the gravity model because it is analogous to the law of gravity in physics, where larger objects exert a stronger gravitational pull. In the context of trade, the economic size (often measured by GDP) of two countries is akin to the mass of two objects, and the distance between them is similar to the distance in the gravitational formula.
The basic premise of the gravity model is that larger economies tend to trade more with each other because they have more goods and services to offer and are generally more integrated into global markets. The greater the economic size of a country, the more likely it is to engage in trade with other large economies, resulting in higher trade volumes. On the other hand, distance plays a significant role in trade patterns. Countries that are geographically closer tend to trade more with each other because transportation costs are lower and logistical barriers are reduced.
Other factors like trade policies, labor productivity, and factor endowments certainly influence trade, but they are not the primary drivers according to the gravity model. While trade policies, for example, can affect the volume of trade, they are considered external variables that may modify the predictions made by the gravity model. However, the relationship between economic size, distance, and trade patterns remains a core principle of this model.