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The purpose of this question is to derive a gravity equation in the Melitz (2003) model. Recall that the sales of a firm in country
The purpose of this question is to derive a gravity equation in the Melitz (2003) model. Recall that the sales of a firm in country i with productivity selling to country j are equal to () ()= , where is total income in country j and is the country's price index. Let () be the (equilibrium) density of firms that sell from i to j. Assume that the wage level in country i is
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