To test the gravity equation of trade, a regression model was calculated for two nations, the United States and Canada, testing the correlation among:
A) intra-industry trade, size of GDP, and distance for states and provinces.
B) intra-industry trade, size of GDP, and size of states and provinces.
C) bilateral trade and ratio of GDP for states and provinces.
D) bilateral trade, size of GDP, and distance for states and provinces.

Question

Quizplus · Accepted Answer

The gravity equation of trade states that bilateral trade is positively related to the size of GDP of the countries involved and negatively related to the distance between them. Therefore, the regression model that makes the most sense to test this equation would include bilateral trade (dependent variable), size of GDP (independent variable), and distance (independent variable) for the states and provinces of the United States and Canada. Option D includes all of these variables, making it the best choice.

To Test the Gravity Equation of Trade, a Regression Model