Answer to Question #258495 in Economics for hafiz

Question

ANSWER THE FOLLOWING QUESTIONS

1. What is the main product category or sector which is the most important one in recent years, as compared to 70 years back? Explain!

2. With the use of mathematical equation, explain gravity model.

3. What is the relationship of the following variables with trade? Explain!

a. distance

b. income

4. Identify and explain 5 determinants of trade, that you know.

5. Is there any empirical evidence to support the prediction of gravity model? Explain

Answer 1

1. It is the service sector that is most important sector in recent times, when compared to the 70 years back. Today, service is the most important basis of value creation and marketing to the consumers.

2. The gravity model of international trade states that the volume of trade between two countries is proportional to their economic mass and a measure of their relative trade frictions. Perhaps because of its intuitive appeal, the gravity model has been the workhorse model of international trade for more than 50 years.

3. a. The gravity model of trade, the workhorse of trade theory, predicts that bigger economies that are close together will trade more with each other. Such factors are particularly relevant for trade in goods: the longer the distance that goods need to travel, the higher the trade cost, thus reducing trade flows.

b. There is a positive relationship between international trade and income. A 1% increase in international trade between countries causes to increase in income by 1.57% on average.

4. These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation, and demand.

5. The model has been an empirical success in that it accurately predicts trade flows between countries for many goods and services, but for a long time some scholars believed that there was no theoretical justification for the gravity equation.