Tuesday, June 11, 2013

Germany As Example Of The Gravity Model Of Trade

Here is a chart of Germany's 10 biggest export destinations and import suppliers in 2012:
5 out of 10 in both categories are euro area countries, namely 4 of the 5 euro area countries that borders Germany, namely France, the Netherlands, Austria and Belgium. The fifth euro area country that borders Germany, Luxembourg, isn't included because of its small size, while Italy is with even though it doesn't border Germany because of its large size (and because the distance isn't that great).

4 non-euro area countries, China, the U.K., the U.S. and Switzerland is also in both categories. In the first three cases that reflects the large sixe of these economies (though Britain is also relatively close geographically as well), while in the case of Switzerland it reflects that it borders Germany.

Russia is not among the top 10 export markets, but it is the seventh largest import supplier, no doubt reflecting mainly supplies of natural gas and other energy products. Poland is not among the top 10 import suppliers, but it is the tenth biggest export market.

In short, Germany's trade is mainly with countries that are geographically close or whose economies are relatively large, or both in the case of France and to a lesser extent also Britain and Italy.

This is consistent with what one could call the gravity model of trade. The extent to which the gravity of various celestial bodies affects us depends in part om how large they are and in part on how close they are. Earths gravity affects us the most because we are on it. After that, the Sun and the Moon affects us the most, in the Sun's case because of its enormous size and in the Moon's case because it is the celestial body closest to us, except for Earth.

Similarly, the extent to which we are affected by the "gravity" of other economies depends in part on how large these economies are and in part on how close they are.  The reason why economic size increases an economy's "trade gravity" is of course because a larger purchasing power increases the likelyhood that they have things to sell to other countries and have the ability and will to buy from others. The reason why geographic proximity increase the extent to which others are affected by the "trade gravity" is because it imply lower transportation costs.

 China and the U.S. are because of their large size important trading partners for almost all countries in the world (except for countries like Iran where political factors prevent trade). By contrast, relatively small countries can be important trading partners to neighbors. Denmark's, Finland's and Norway's economies are relatively small but they are still all among the top 10 trading partners of Sweden, with Norway being in fact the second biggest after Germany.

There are some exceptions to this rule, but in the most cases it reflects political factors, with the non-existent trade between the Arab countries and Israel being the best example of this.


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