torsdag 4 januari 2018

Economists’ flawed gravity model

One of the arguments put up for the UK’s membership of the EU is the gravity model - that trade depends on proximity.

However, trade also depends on factors such as the presence of intervening oceans and the effects of language, legal systems, traditions, cultural and family ties. Members of ethnic groups eg Jews, Chinese, Indians - can easily trade with their friends and family half way round the world.

The gravity model also denies comparative advantage. If you want grapes in January you have to get them from somewhere in the Southern Hemisphere. Comparative advantage also works against the UK in regard to trade with continental Europe, due to the costs of transport. A manufacturer in Germany is perfectly placed for overland delivery to half a billion customers. The UK producer has sixty million within overland delivery range. To reach the rest, the goods must be sent over the sea.

Only the south-east corner of the UK is geographically close to continental Europe. Most of the country is a long drive to Dover or Cheriton, including around the congested M25 or M27. Otherwise, a long ferry crossing must be used: from Hull, Immingham, Harwich or Tilbury, to one of the continental ports between Gothenburg and Zeebrugge, depending on the destination.

Once goods are put in a container and loaded onto a ship, the economics of the logistic operation changes, as the cost of distance becomes trivial. Ports on the UK’s west coast are poorly placed for freight movement to continental Europe. From Liverpool, for instance, it takes little longer to send goods across the Atlantic than it does to send them to Hamburg.

People should look more critically at the over-simplified models that apply in economic theory.

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