NORTH SOUTH UNIVERSITY

Course: INB 400

(International Trade and Finance)

Section- 1 (Fall 2020)

Assignment

Prepared For-

Mahmud Habib Zaman [MHZ]

Senior Lecturer

Marketing and International Business, SBE

Prepared By-

Zarin Tasnim Khan 1611766030

Sohel Ahmed 1612437030
Farha Zabin Tuba 1711291030
Rafid Alam
1712917030

Submission Date 19th July 2020

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1.What is gravity model?

The gravity model estimates the pattern of international trade. The model has been adapted from

Newton’s laws of gravitation. While the model’s basic form consists of factors that have more to do

with geography and spatiality. The gravity model has been used to test hypotheses rooted in purer

economic theories of trade as well. One such theory predicts that trade will be based on relative factor

abundances. Statistically measure bilateral trade flows between different geographical entities or

regions  in the simplest gravity model, bilateral trade flows between two countries are assumed to be

proportional to the product of their gross domestic products  and inversely proportional to a measure

of the distance between them.

2.Diagram of the Gravity Model

The formula of Gravity Model is: Tij = A x Yi x Yj /Dij

Where,

Tij is the value of trade between country i and country j

A is a constant

Yi the GDP of country i, Yj is the GDP of country j

Dij is the distance between country i and country j

Countries determine the size of the economies of different countries and the value of their trade with to

predict the condition of trades. Here is an example of the recent findings of China’s Exports by using

the Gravity Model:

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3. Uses and benefits of the gravity model

The gravity model is a typical scientific example used to anticipate at least two communications.

Through geology, some transition designs, for example, traffic, mail streams, calls, and relocation

were recreated. The model of gravity can likewise be utilized for deciding the locale of impact of

every focal situation by ascertaining where the breakdown point is to happen. The model of

seriousness can be utilized to survey administration quality (for example access to social insurance).

The two-phase gliding catchment zone (2SFCA) framework, which is basic in research in human

services, is an exceptional instance of a genuine model.

The advantages of the gravity way to deal with displaying change forms in outer exchange comprise of

the capacity of gravitational models to clarify examples of universal exchange dependent on

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moderately little information and the hypothetical legitimacy of the model for progress economies.

Nonetheless, in about any business model that takes care of business costs that develop with

separation, a relationship of gravity can rise. The gravity model gauges the worldwide exchange

design. Despite the fact that the essential type of the model comprises of topographical and spatial

elements, the Gravity Model was utilized to test speculations established in unadulterated exchange

hypothesis.

4.Why countries and government opt for the model?

Trade-related integration between the developing countries and the GCC (Gulf Cooperation countries)

countries is of great benefit to both. These benefits go beyond the economic consequences for the

world, since the developed and GCC nations have a shared slogan on regional security and

environmental, political and cultural issues. The establishment of the GCC and the regional trade

agreements established is of significant importance as it is deemed important to advance cooperation

on non-monetary aspects.

The GCC countries are highly dependent on each other, with a GDP export ratio varying from 74% to

40% respectively in Bahrain and Saudi Arabia.

The entire field has an annual export valuation of $155B consisting of mainly oil and gas sectors and

these covers 83% of the export.

Economically gravity model-based trading is important and beneficial for a group or nearby countries

at the end both consumers and government benefitted from this trade taxes and variety of products.

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