Note: Same information for questions 1-4. Two countries, A a…
Note: Same information for questions 1-4. Two countries, A and B, share a border. Country A has five states: A0, A1, A2, A3, and A4. Country B has four states B1, B2, B3, and B4. The states were numbered in such a way that: Equally numbered states have the same GDP (GDP of state A1 = GDP of state B1, etc.). The distance between A0 and equally numbered states is about the same (the distance between A0 and A1 is about the same as the distance between A0 and B1, etc.). The following table shows distance in miles and total trade in millions of dollars, between A0 and the different states of each country. Use the gravity model to answer this question: Tradeij= A (GDPi GDPj) / Distanceij, where Tradeij is the trade volume between states i and j, A is a constant, GDPi is the GDP of state i, and Distanceij is the distance between state i and state j. Country A States Distance between Country A States and state A0 Trade between Country A States and state A0 Country B States Distance between Country B States and state A0 Trade between Country B States and state A0 A1 350 1388 B1 345 678 A2 350 1022 B2 345 481 A3 700 B3 673 A4 1567 544 B4 1593 233 Choose the right combination of statements to answer questions 3 and 4: I. The larger an economy is, the more goods it has to export, and the more income it has to import goods. II. The larger the distance between two economies, the higher the trade costs between them. III. A border between two economies may introduce additional trade costs. Which combination of the statements above might help in explaining that trade between A0 and B1 is much smaller than trade between A0 and A1?
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