Two countries with which the US conducts a large amount of trade are China and Mexico....

 

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Two countries with which the US conducts a large amount of trade are China and Mexico. The table below provides real GDP and the distance between countries in miles as well as the actual imports by the US from these countries in 2019. Use the 2019 import numbers given as the actual amount of trade between the US and China and the US and Mexico. Use the version of the gravity model where GDPw represents B. Start with the following parameters: n=.50 and GDPw = $87,652 billion. a. Try some different values for n and estimate the expected amount of trade between the US and China, and the US and Mexico based on the Gravity model. What single value for n provides a good estimate of both trading relationships? How different to the n's have to be in order to get a precise estimate of trade (do not go beyond two decimals)? b. Based on your answers in a. what is n telling us? Try changing the distance I provided for Mexico from the US (there is no magic in the 100 mile number I chose). What happens to predicted US Mexico trade as the distance approaches zero? Think of n acting as a proxy for trade frictions. Gravity Model B includes tariffs, transportation costs, differences in tastes as well as the frictions due to borders, different currencies and income differences (GDP GDP) distn Trade B where B is a constant, GDP; is the gross domestic product of country i and dist is the distance between two countries to the nth power. B represents a summary of all other factors. Gravity model with monopolistic competition: Trade = (GDPShare) distn ) = GDPw The term (GDPW) represents B in this version of the Gravity Equation. This version assumes that trade will be proportional to the relative size of the countries as measured by their GDPs and inversly proportion to the distance between the two countries. (GDPGDP) distn Two countries with which the US conducts a large amount of trade are China and Mexico. The table below provides real GDP and the distance between countries in miles as well as the actual imports by the US from these countries in 2019. Use the 2019 import numbers given as the actual amount of trade between the US and China and the US and Mexico. Use the version of the gravity model where GDPw represents B. Start with the following parameters: n=.50 and GDPw = $87,652 billion. a. Try some different values for n and estimate the expected amount of trade between the US and China, and the US and Mexico based on the Gravity model. What single value for n provides a good estimate of both trading relationships? How different to the n's have to be in order to get a precise estimate of trade (do not go beyond two decimals)? b. Based on your answers in a. what is n telling us? Try changing the distance I provided for Mexico from the US (there is no magic in the 100 mile number I chose). What happens to predicted US Mexico trade as the distance approaches zero? Think of n acting as a proxy for trade frictions. Gravity Model B includes tariffs, transportation costs, differences in tastes as well as the frictions due to borders, different currencies and income differences (GDP GDP) distn Trade B where B is a constant, GDP; is the gross domestic product of country i and dist is the distance between two countries to the nth power. B represents a summary of all other factors. Gravity model with monopolistic competition: Trade = (GDPShare) distn ) = GDPw The term (GDPW) represents B in this version of the Gravity Equation. This version assumes that trade will be proportional to the relative size of the countries as measured by their GDPs and inversly proportion to the distance between the two countries. (GDPGDP) distn