Why does the gravity model work?
A) Large economies became large because they were engaged in international trade.
B) Large economies have relatively large incomes, and hence spend more on government promotion of trade and investment.
C) Large economies have relatively larger areas which raises the probability that a productive activity will take place within the borders of that country.
D) Large economies tend to have large incomes and tend to spend more on imports.
E) Large economies tend to avoid trading with small economies.
Question 2 - Economic growth at constant world prices will ________ cause the output of one good to fall absolutely.
A) never
B) sometimes
C) always
Question 3 - Given the input-output relationships in the table below:
Countries
A B
Goods
X 8 4
Y 4 1
(a) Which country has absolute advantage in which good and why?
(b) Which country has comparative advantage in which good and why?
(c) If A is endowed with 8000 hours of labor, how much X will it produce after trade begins? How much Y? Explain.
(d) What is the allowable range on A's wages relative to B's if trade is flowing between these two countries according to comparative advantage?
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