Question

Consider the following statements below.

(i.) According to the basic gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is the product of their gross domestic products (GPDs).

(ii.) Colonial and historical ties is also a characteristic that can also affect the probability of trade between any two countries and may help explain the possible differences between the predictions of the basic gravity model and actual trade flows.

(iii.) One of the important implications that we can derive from the gravity model is the pattern and composition of trade (in terms of types of goods) between any two countries. For example, it will predict that countries with huge oil resources will tend to export oil and petroleum-based products.

Choose the best answer.

a. Only statements (ii) and (iii) are true.

b. Only statements (i) and (ii) are true.

c. Only statement (i) is true

d. All the above statements are true

Answer 1

According to the basic gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is the distance between them.Colonial and historical ties is also a characteristic that can also affect the probability of trade between any two countries and may help explain the possible differences between the predictions of the basic gravity model and actual trade flows. One of the important implications that we can derive from the gravity model is the pattern and composition of trade between any two countries. Hence, option(A) i.e only statements (ii) and (iii) are true.