problem

Economists often estimate a general gravity model of the following form

T_ij = A*X^a *Y^b/D^c

Assume that the model above is estimated to predict volume of trade between Morocco (M) and USA . The result of the estimation is as follows:

T_MUSA = (M^1.3)*(USA^3.5)*(D^-0.8)

All the coefficients are significant and R =60%

R indicates the trade variation explained by three factors (M,USA,& D)

Where

T_MUSA: represents volume of trade between Morocco and France

M: indicates Morocco GDP in USA Dollars

USA: represents USA GDP in USA Dollars

D: represents the cost (in USA dollars) of transportation between Morocco and USA .

The coefficients a,b,& c represent the elasticities of trade with respect to each factor respectively .

Using the model above answer the following questions

1. What kind of relationship exits between the volume of trade and each one of its Determinants? Justify your answer based on the model estimated.
2. In the framework of trade interpret the estimated coefficients (a,b,c) of the model .
3. What are other factors that may explain trade other than the sizes of the economies (GDPs) and transportation cost.
4. If France USA GDP increases by 2% , and Morocco GDP increases 1.2% , and the cost of transportation decreases by 3% what will be the change of the volume of trade between Morocco and USA ? show your work .