Question 1. Consider the standard gravity equation for bilateral trade between any pair of
countries, i and
Ti,j = A/Di,j * YiYj
The distance (measured in flight time) between the Shanghai and Beijing is 2 hours,
while the distance from Beijing to Tokyo is 3 hours. Bilateral trade between Shanghai
and Beijing is equal to 20% Shanghai's GDP, while bilateral trade between Beijing and
Tokyo is equal to 5% Tokyo's GDP.
a) Is the information above consistent with the standard gravity model above?
Why or why not?
b) In addition to flight time, shipments between Beijing and Tokyo are delayed
by customs inspection. If we assume that both trade between Beijing-Tokyo
and trade between Beijing-Shanghai fit the standard gravity model, how many
hours does this imply a shipment spends in customs between Beijing and