Trade flows predicted by size and distance, the most empirically successful model in economics.
Warming up the engine…
Trade between two countries scales with the product of their economic sizes and shrinks with the distance between them, an empirical law as reliable as any in economics.
Trade_ij = A · (GDP_i · GDP_j) / Distance_ij^θ
Big economies produce and buy more of everything, and distance still costs real money in freight, time, and information frictions. The model fits trade data astonishingly well and doubles as a measuring device: borders, common language, and trade agreements show up as gravity 'bonuses', letting economists price the effect of policy in kilometres.
Log-linearize it: ln(trade) = ln A + ln GDPi + ln GDPj − θ·ln(distance), ready for regression. The distance elasticity θ ≈ 1 is the number worth quoting.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Also in Trade & Open Economy
Equilibrium at d 30, T 10.0.
Equilibrium: d* = 30.0, T* = 10.0
Current equations
Trade behaves like gravity: big economies attract more of it, and distance pushes it away. Slide the partner's distance and watch flows fall, geography is still destiny in trade data.