1. [GRAVITY MODEL OF TRADE] (15 points) The gravity model of trade has been a workhorse empirical model for international trade economists since it was introduced by Jan Tinbergen in 1962. Though the model was initially one only used in econometric estimation (that is, it was not theoretically motivated), the gravity model of trade has since been shown to result from a variety of different trade models.

a. (4 points) Give the generic equation for the gravity model of trade (note: do not assume the exponents on the variables are equal to one). State what each variable in the equation means and explain how the independent variables (the variables on the right hand side of the equation) can help explain trade flows.

b. (2 points) Explain how the gravity model of trade can be used to spot anomalies in trade patterns.

c. (4 points) State the econometric specification of the gravity model of trade that McCallum used to estimate the border effect between the United States and Canada. Explain how the variable works.

d. (3 points) Show that McCallum's specification in part c is a log-log specification of the gravity model of trade (with the caveat that McCallum added the variable as an explanatory variable to the more generic gravity model specification given in part a).

e. (2 points) Explain other variables (besides those already in the gravity model of trade) that you believe can help explain trade patterns. How would you include those in a specification similar to McCallum?

2. [RICARDIAN MODEL OF TRADE] (5 points) In chapter 3, your textbook discusses twenty-six sectors of the economy for both the United States and Great Britain post-World War 2. Using the Ricardian model of trade, explain why even though the U.S. was more productive in all twenty-six sectors, Great Britain exported more than the United States in twelve of those sectors.

(Please summarized the answer and with graph if possible)

Thank you