Gravity Model of Trade

The gravity model of trade explains bilateral trade flows by analogy to Newton's law of gravitation: trade between two economies is proportional to their economic sizes and inversely related to the trade costs (such as distance) between them. First applied empirically by Jan Tinbergen in 1962 and given a rigorous theoretical foundation by Anderson and van Wincoop in 2003, the structural gravity model shows that trade depends not only on bilateral barriers but on those barriers relative to each country's overall, multilateral resistance to trade.