Chapter 2 (Who trades with whom?)
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Gravity Model of Trade
Bilateral trade is a function of distance, population and the size of two countries' economies.
- Simply richer, more populous countries buy more and transaction costs are a function of distance.
- Only predicts total flows, not what is traded
- Simply richer, more populous countries buy more and transaction costs are a function of distance.
- Only predicts total flows, not what is traded
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Gravity Model of Trade - equation
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What are impediments to trade?
Distance, trade barriers, and borders
Note 
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