Trade between two countries, i and j, tends to be close to t…
Trade between two countries, i and j, tends to be close to the gravity formula: Tradeij = k (Yi Yj)/Dij, where Tradeij is total volume of trade between the two countries, Yi is the GDP of country i, Yj is the GDP of country j, and Dij is the distance between the two countries. Consider the total trade between country A and country B, compared to total trade between country A and country C. Suppose that country C’s GDP is 8 times country B’s GDP. Suppose that the distance between country C and country A is twice (2 times) the distance between country B and country A. If the gravity model holds exactly, you would conclude: