Short Paper Gravity Model for Trade between Singapore and Malaysia using Employment

This paper uses GDP and employment data based on the Gravity Model to account for the trade volume between Singapore and Malaysia. There are two ways to operationalize this gravity model. One is based on GDP which is the current practice in the literature. But in this paper, we also use employment data. It is found that, to account for trade volume between Singapore and Malaysia, employment data performs better than the GDP data. Employment performs better than GDP because GDP is the result of trade but employment is an input to create trade volume.


A Selective Literature Review
As the economy of Singapore and Malaysia is growing through these decades, trade volume between the two Southeast Asian countries grows, some fluctuations happen though. When economic crises or depression hurts their economy, the bilateral trade volume will also decrease. This proves that the size of their economies is related to their bilateral trade volume.
The Gravity Model is often used to measure or predict international trade between the two countries.
We use Equations for our analysis: Where T ij = Value of trade between country i and country j Y i = GDP/Labor Force of country i Y j = GDP/Labor Force of country j D ij = Distance between the two countries (i and j) The variables of the equation arouse many discussions. The study of Leamer and Levinsohn (1994) proves that distance has an impact on bilateral trade by providing empirical evidences. Hummels (n.d.) argued that shipping costs including freight charges and marine insurance) can explain why distance matters. However, shipping cost is not important for bilateral trade between Malaysia and Singapore. Anderson (1979) puts forward some limitations of the equation when it comes to the additional variables of policy considerations. Enhanced Gravity Model (EGM) is put forward as the simplest model that combines the GM with the network approach within a maximum-entropy framework (Almog et al., 2015). Hassan Khayat (2019)  paper's replacing GDP with employment data to measure the economic size of countries is new to research on the Gravity Model. Previously, GDP is often considered as the best index to evaluate a country's economic size. However, this paper provides another way to do it: employment data (labor forces of countries).

Methodology and Hypotheses
The Gravity Model is an empirical tool that can help understand trade between any two countries. The model is based on a strong empirical relationship that exists between the trade volume and the economic size of the two countries as well as the distance. The size of a country's economy is represented by its Gross Domestic Product (GDP). The model's name is originated from the analogy to Newton's law of gravity. Krugman et al. (2012) stated the analogy: "Just as the gravitational attraction between any two objects is proportional to the product of their masses and diminishes with distance, the trade between any two countries is, other things equal, proportional to the product of their GDPs and diminishes with distance" (pp. 12-13) There are two ways to operationalize this gravity model. One is based on GDP which is the current practice in the literature. But in this paper, we also use employment data. The Gravity Model will be applied to the analysis of trade between Singapore and Malaysia with the bilateral trade figures from 1989 to 2018. GDP and labor force data are respectively used as data with regard to economic sizes to run the gravity model. The results then will be compared and a discrepancy is expected. It is expected that this essay can contribute to research on the Gravity Model and trade between Singapore and Malaysia.

Gravity Model based on GDP and Labor Force
We will make an attempt to see whether the GDP or the labour force perform better based on Gravity model.

Labor Force as Y
Labor force statistics can also be used to evaluate the economic size of both countries. It is expected that the equation result is different because of different statistical characteristics between two GDPs and two labor forces.
Pearson's coefficient is used to measure the statistical characteristics of two GDPs and two labor forces. According

Comparison between GDP and Labor Force as Y
As shown in Figure 1, disparities exist between the actual trade volume and Equation 1*/1**. However, Equation 1* predicts better with narrower disparity. Specific data can be seen in Table 1.  For Equation 1** (Labor Force), the average disparity is 9.67 and the standard deviation is 7.45.
Consequently, the calculation based on labor force statistics approaches more to the actual volume with lower average disparity and lower standard deviation. In other words, employment data predicts better than GDP for the Gravity Model based on Equation 1 (Note 1).

Conclusion
This paper studies the Gravity model by using GDP and labor force to evaluate the economic sizes (Y) of Malaysia and Singapore. It is found that, instead of GDP, when labor force represents the economic size based on Equation 1, the result approaches more to the real data. In conclusion, the employment data can be a second choice for measuring the economic size when it comes to the Gravity Model, and it is possible that the employment data predicts better than GDP.