Homework 4

Omar Trejo - 119711 Econom a Internacional I

Exercise 1
Plot (scatter plot) natural logarithm of total imports log(In) against natural logarithm of total absorption log(Xn), across countries. Let absorption be on the X axis and imports be on the Y axis. Label each axis carefully. This graph should (hopefully!) look similar (qualitatively) to the graph on slide 6 of the lecture notes on Gravity Equation. Interpret the graph1 .

1 The graph presented here has dierent magnitudes than the graph presented in [1]. The graph presented there shows USAs total absorption to be near $10,000 billion ($10,000,000,000,000). The graph presented here shows USAs total absorption to be near $10 billion ($10,000,000,000), which is clearly not equal. Im not sure why this is happening.

The relationship this graph shows is a very intuitive one: the more a country absorbs, the more it imports. Its relation to the gravitational law is straightforward: the larger the country (total absorption), the more it attracts commodities (imports). It clearly shows a direct relationship (positive slope), which supports the previous assertion.

Exercise 2
Plot (scatter plot) country is market share in each destination n, Xni /Xn (on Y axis), against country is total production, Yi (on X axis). Note that the gure will also include observations on country is penetration of its own domestic market, Xii /Xi . Choose a dierent symbol to represent this observation (say a + rather than a circle). This graph will (again hopefully!) look like the one on slide 7 of the lecture notes on Gravity Equation. Interpret the graph 2 .

This graph shows a direct relationship (positive slope) between the production of a country and its share in the markets of all importing countries (represented by the circles). Its clear from the graph that each country has the largest share on its own market (represented by the + symbols in the graph), which is very
2 Two dierences arise between this graph and the one shown in [1]. First, a magnitude problem, like the one in the rst graph, is also present. Second, the variance is not diminished as the gross production increases.

intuitive. The relationship with the gravitational law is straightforward also in this case: the larger the country (larger gross production), the larger the eect it has in other countries (market share).

Exercise 3
To isolate the role of geography construct an index of bilateral trade dened as, Bni = (Xni Xin )/(Xii Xnn ). This index appropriately adjusts for the eect of size by normal- izing with the home sales of each country in the pair, and treats the countries in the pair symmetrically. Plot Bni against distance ni, across all country pairs, excluding the country pairs in which importer and exporter are the same.

This graphs shows an inverse relationship (negative slope) between the distance between two countries and how much they trade. Its clear from the graph that the smaller the distance between two countries is, the more they are likely to trade. In this case, theres also a relationshipo to the gravitational law : the further apart two countries are (distance), the less eect (trade) they have on each other.

References
[1] Rahul Giri, Chapter 11: The Gravity Equation, International Trade Theory, ITAM.