Assume that the world consists of two countries (or regions) that are identical in structure and look like the small open economy discussed in section 1.4. One immediate consequence of this assumption is that we must do away with the ad hoc export demand function (11.29), since we know from (11.25)-(11.27) that the domestic economy's demand for imports is given by:

Cf + If + Gf = (1 - ot)S20 ) [C(Y) + l(r) + G]

•

= (1 - ag20 (E—p— Pia [A(r, Y) + G] . (11.42)

But the domestic economy's exports are (in a two-country world) just the foreign country's demand for imports which, in view of the symmetry assumption, take a form similar to (11.42):

.EX =T. Cf + + G'; = (1 - a)00 (

EP 7- [A(r* , Y*) + G*] ,

*) " (11.43)

where we have used the paring (T2.1) and (11.

ways. First, the interest before. The reason is the countries, and since sue., Second, foreign governu directly (via the term i: .

Of course, the foreign in form to (11.45). By IT written as: I

-WIE1R dr* + (oc a

[(1 - cox )(1 -

1 - (1 -•