You asked to calculate the gravity model, but there is only one country\'s GDP given in the dataset

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Homework 2

1) Check Baier and Bergstrand (2007), on page 78, in the second graph, "This reason suggests that FTAij and ϵij are negatively correlated, and the FTA coefficient will tend to be underestimated." Can you try to explain why intuitively using a regression equation? (Hint: when regressing trade on FTA, we assume that FTAij and ϵij have zero correlation.)

2) Please use the attached STATA data for country level trade. Do gravity equation using five variables we found in column (1) of Table 1 in Fratianni et al. (2011) using various fixed effects and report the results. Check what happend to your variables in various dimension.

- each country fixed effects

- country pair fixed effects

- country pair fixed effects and time fixed effects

- country-time fixed effects

One of the student ask this question and professor replied as this 

Dear all:

Thanks to Edvard's question, I'd like to clarify HW 2.

1) You asked to calculate the gravity model, but there is only one country's GDP given in the dataset? 

--> You see variable of log product of GDPs, ln(GDP1*GDP2). Please think about the coefficient on this GDP product variable in the gravity equation.

2) It doesn't let me run country pair fixed effects and country pair/time fixed effects because I need a big value of maxvar, but the STATA IC allows only for 2048

--> In this case, you select subsample (say 10 country pairs and 5 years) and run fixed effect regressions. 

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