Home Economics Ian Dunt Should Try Understanding The Gravity Law Of Trade

Ian Dunt Should Try Understanding The Gravity Law Of Trade

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This sort of thing is always amusing. Someone shouting at us that this is just the truth, this is reality, we can;t argue at all. And managing to get the point wrong while doing so. So, over to Ian Dunt:

There are certain natural laws in trade. You trade most with the countries which are closest to you. Putting up obstacles to it means you trade less. Removing them means you trade more. Beyond all the ideological noise, these dynamics are inevitable. They are the gravity of the trading world. You can deny them until you are blue in the face, but that does not make them go away.

No, that’s not true.

It is, often enough, a reasonable shorthand of the truth but as with all shorthands it goes awry in certain circumstances. This being one of them.

So, a question. Olden times, did Newcastle trade more with Carlisle or London? 80 miles or 300? The answer is London and 300 miles, that coastal coal trade. Why? Because sea transport was easier and cheaper than slogging over the 80 miles of moorland to Carlisle.

So, it’s not geographic distance that defines that gravity model of trade. The model itself is true, the larger an economy the more you trade with it, the closer the economy the more you do as well. But it’s economic distance, not geographic, that determines it.

So, transport links, they’re one form of economic distance. So are cultural issues, linguistic – we should trade with New Zealand hardly at all, about as much as we do with Mongolia perhaps judging by distance, or Peru, Kazakhstan, by size, but that ain’t the way it works out – legal and so on.

In fact, you’d probably find, using purely geography and size of economy – you know, only 26 miles of Channel – that we undertrade with France even within the EU just as we still overtrade with much of the Anglosphere. Geography being not the most important part of economic distance. Not when a container costs $5,000 from anywhere to anywhere. We definitely overtrade with Holland with respect to France, despite that geography.

Which is also why Newcastle probably still trades more with London than it does with Carlisle….

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6 COMMENTS

  1. There are so many confounders in the modern world that this so-called law ought to be forgotten. My old firm shipped high-value items all over the world. Except we didn’t, we put it in a box and waited for a man to come and pick it up. He shipped it to wherever
    it was supposed to go and distance didn’t come into it as far as we were concerned. Then for some commodities it’s who can supply them at a given time of year. Doesn’t matter how close Europe is if fruit comes from the southern hemisphere summer. Ditch that so-called law, repealed by reality.
    .

    • I must concede that if I want a book, and it’s not available on the net, I just order it, and they send it from anywhere. The last one came from Florida, I think.

      So I’d have to agree with you, Rhoda.

  2. If geographic distance was the deciding factor neither Hong Kong nor Singapore would have got a start, New Zealand and Australia would be impoverished and so would Japan.
    In the nineteenth century Britain’s top four trading partners were Argentina, Brazil, USA and Canada- hardly our nearest neighbours.

  3. Given the headline and where the article is published, I suspect That even if Ian Dunt does know the correct interpretation of the Gravity Law of Trade, he ignores it to make a simplistic anti-BREXIT, pro-EU claim.

  4. Tim I don’t know if it was you who once called it the price distance. We the buyers are interested in landed cost and don’t care which land it comes from. It takes about the same time for a machine to get here from Shangai as it does from the NWC, and Shanghai ripoffs are getting pretty good.

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