Consider the following gravity equation, which introduces another bilateral covariate in addition to distance The new...

 

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Consider the following gravity equation, which introduces another bilateral covariate in addition to distance The new variable is bothEUod, which is an indicator variable taking the value of one if both country o and country d are members of the European Union and taking the value of zero otherwise. The coefficient on this covariate is ("delta"). Consider Brexit, which in January 2020, for country pairs in which o=United Kingdom and d is an EU member (and vice versa), switched the indicator from bothEUod-1 to bothEUod-0. You are told that researchers have estimated that =0.25. Thus, Brexit was expected to reduce UK exports to EU members by 25%. The UK government assures you that they will negotiate a new free trade agreement with the United States, which has roughly the same GDP as the EU as a whole. Suppose policymakers want total UK exports to remain unchanged after Brexit. By about how much must the new US-UK agreement boost UK exports to the US to make up for reduced UK exports to EU members? Is this roughly 25%, more than 25%, or less than 25%? Consider the following gravity equation, which introduces another bilateral covariate in addition to distance The new variable is bothEUod, which is an indicator variable taking the value of one if both country o and country d are members of the European Union and taking the value of zero otherwise. The coefficient on this covariate is ("delta"). Consider Brexit, which in January 2020, for country pairs in which o=United Kingdom and d is an EU member (and vice versa), switched the indicator from bothEUod-1 to bothEUod-0. You are told that researchers have estimated that =0.25. Thus, Brexit was expected to reduce UK exports to EU members by 25%. The UK government assures you that they will negotiate a new free trade agreement with the United States, which has roughly the same GDP as the EU as a whole. Suppose policymakers want total UK exports to remain unchanged after Brexit. By about how much must the new US-UK agreement boost UK exports to the US to make up for reduced UK exports to EU members? Is this roughly 25%, more than 25%, or less than 25%?

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To determine by how much the new USUK agreement must boost UK exports to the US to make up for reduc... View the full answer