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International Trade Theory / model of Dornbusch, Fischer, and Samuelson (DFS) Suppose the world consists of two regions: the United States (USA) and the rest

International Trade Theory / model of Dornbusch, Fischer, and Samuelson (DFS)

Suppose the world consists of two regions: the United States (USA) and the rest of the world (ROW), and of a continuum of goods which are indexed between 0 and 1.

Use a diagram with schedules A and B as the ones in the model of Dornbusch, Fischer, and Samuelson (DFS). It is predicted that the population in ROW will increase relative to population in USA in the following decade.

a) Use your diagram to explain how the increase in the relative population of ROW affects the relative wage and the range of goods in which USA exports and imports. b) Compare consumption quantities in USA in the initial and new equilibria for the entire range of goods. Based on this comparison, can I conclude that welfare in USA necessarily rises?

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