Table: Gravity Estimate, Imports of Travel Services Dep. Var: trade value OLS GDP per capita - importer 1.42*** Observations: 2,446 GDP per capita - exporter Population - importer 0.360 R-Squared 1.781* 0.73 Population exporter -2.907** Distance 0.577 Adjacency 1.071 EU 7.6 Language 0.852* 0.178 Temperature-importer Temperature exporter Constant 2.58* -15.693 InMijt = ij + lnGDPpct + 2lnGDPpc t + 3lnPopit + lnPop + lnDistance; + BAdjacency; + Language; + EU + lnTemp; + lnTemp; + + & ijt In the literature, imports of travel services are found to be positively influenced by a common language, GDP per capita and population in the importing country. Although the distance between the importer and exporter is typically expected to have a negative impact on trade in goods, it needs to be clarified from the review of the existing literature that this is necessarily the case for services. Service products do not have to be physically transported from location to location. The dummy variables indicate whether the importing country and exporting country are adjacent, share a common language and whether both are members of the European Union. All three are expected to be positively related to the level of trade. The additional variables Tempi and Tempj are the average annual temperatures of the exporting and importing countries. The literature suggests that travellers are attracted to warm countries, particularly tourists. Warmer average temperatures in the exporting country (i.e., the destination country of the traveller) positively affect imports of travel services. a. Using the regression table above, write the gravity equation for the import of travel services. What are the elasticities of travel services concerning the importing country's GDP per capita, population and relative to distance? Are the variables statistically significant and explain what happens to travel services if there is a 1 percentage increase in each of the variables. How well does the model explain travel services?