1.) Gravity questions:

a) (6 marks) From the trade flows equation of the structural gravity model ,

solve for a country's share of consumption made up of goods from its own country. Use this equation to answer why the US has a lower trade/GDP ratio than Canada, i.e. why does the US trade less? Hint: you may assume that when a country ships goods to itself, that the iceberg cost is 1.

b) (6 marks) Suppose we were interested in estimating the effect of having an embassy in another country on trade flows between the two countries involved (i.e. if Canada has an official embassy in Japan, do Canada and Japan trade more with each other?). You collect a variable , which captures whether country o has an embassy in country d, in year t. Name at least two sources of omitted variables bias with specific examples of each, and explain what you can do to minimize their impact on your causal estimate.

(12 marks) Gravity questions: a) (6 marks) From the trade flows equation of the structural gravity model Vod = * Ed Do [KER ny(Pra)1 6,Wolve for a country's share of consumption made up of goods from its own country. Use this equation to answer why the US has a lower trade/GDP ratio than Canada, i.e. why does the US trade less? Hint: you may assume that when a country ships goods to itself, that the iceberg cost is 1. b) (6 marks) Suppose we were interested in estimating the effect of having an embassy in another country on trade flows between the two countries involved (i.e. if Canada has an official embassy in Japan, do Canada and Japan trade more with each other?). You collect a variable embassy at, which captures whether country o has an embassy in country d, in year t. Name at least two sources of omitted variables bias with specific examples of each, and explain what you can do to minimize their impact on your causal estimate