Question: B3. (10 marks) a. (5 marks) Suppose there are three countries: Australia, Britain, and Canada. Suppose that trade between Australia and its two trading partners

B3. (10 marks) a. (5 marks) Suppose there are three countries: Australia, Britain, and Canada. Suppose that trade between Australia and its two trading partners follow the gravity equation between Australia and its trading partner i, where i can be either Britain or Canada: 5 XY3 XYZ TAi = D2.5 Suppose that Britain's GDP is 1.5 times as high as Canada's GDP, but the distance between Britain and Australia is twice as high as the distance between Australia and Canada. Which would be larger: the trade volume between Australia and Britain, or the trade volume between Australia and Canada, and by how many times? b. (5 marks) Why can a country consume outside its production possibilities frontier when it engages in international trade? Draw a graph and refer to it in your explanation

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