Gravity model of trade

A gravity model of trade is an economic framework used to predict bilateral trade flows between countries based on their economic size (GDP) and the distance between them. It is inspired by Newton’s law of gravity, where trade between two countries increases with their economic mass and decreases with greater distance due to transportation costs and trade barriers. The model often includes additional factors like shared borders, trade agreements, and cultural ties to refine its predictions. Gravity models are widely used in trade economics to estimate the impact of policy changes, forecast trade patterns, and analyze global trade dynamics.

where:

• Tij is the trade (or interaction) flow between locations (i) and (j),
• M and Mj are the weights of the two locations (e.g., GDP, population, or economic activity),
• dij is the distance or operation cost between the two locations,
• G is a proportionality constant.

We have expanded the traditional gravity model of trade by incorporating additional variables that capture the complexity of modern trade dynamics. Beyond GDP and distance, factors such as trade agreements, infrastructure quality, geopolitical stability, and environmental regulations play crucial roles in shaping trade flows. We also integrate sector-specific data, including energy costs, digital connectivity, and climate policies, to better reflect the evolving nature of global commerce. By enriching the model with these variables, we improve its predictive accuracy, allowing for a more nuanced understanding of trade patterns and their impact on the shipping industry.

Results

The table below presents the values for all the coefficients used in the gravity model, including those for GDP, distance, trade agreements, infrastructure, and other relevant variables. These coefficients quantify the impact of each factor on bilateral trade flows, with larger values indicating stronger influences. By examining these coefficients, we can assess the relative importance of each variable in shaping trade patterns and understand how changes in factors like economic size, geographic proximity, or policy conditions influence trade volumes. The table provides a detailed breakdown, allowing for a clearer interpretation of the model’s results and insights into the key drivers of trade dynamics over time.

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

Trade elasticities

To assess how the relationship between global GDP and global trade has evolved over time, we calculate the elasticity of trade with respect to GDP—defined as the percentage change in global trade volume divided by the percentage change in global GDP. This measure captures how sensitive trade is to changes in economic output. By computing this elasticity annually over the past 20 years, we can track shifts in the trade-GDP dynamic and identify periods where trade grew faster than GDP (elasticity > 1) or lagged behind (elasticity < 1).

Bilateral trade

The results of the gravity model, as shown below, illustrate how bilateral trade flows evolve over time, influenced by the Shared Socioeconomic Pathways (SSPs) and aligned projections of population and GDP growth. By incorporating the SSPs, which reflect different global scenarios of development, environmental change, and policy interventions, we can model how trade patterns shift in response to varying levels of economic growth, technological progress, and demographic changes. These projections help us understand how global trade relationships will adapt over the years, highlighting the impact of economic, population, and policy trends on bilateral exchanges. The gravity model’s application enables us to forecast future trade flows, providing valuable insights into potential disruptions or expansions in international commerce based on these aligned projections.

Growth by ship type

By aggregating the growth in trade across different ship types, we can analyze how various sectors of the shipping industry respond to changes in global trade. The plot below illustrates this aggregation, showing how the demand for different ship types evolves over time, based on trade growth projections. By breaking down the growth by ship type, we gain valuable insights into the shifting requirements of the shipping industry, highlighting which vessel categories are experiencing the most significant increases or decreases in demand.

Author: Diogo Kramel
Model: Gravity model of trade
Repository: GitHub
Data Version: v1.0.0 | 2025-02-13
Latest Update: March 24, 2025
Contact: diogo.kramel@ntnu.no