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In these expressions wat represents the real wage rate measured in units of good a, and pt is the domestic relative price of good b in units of good a. To simplify we assume that the international relative price of good b (p*) is constant- The domestic relative price is given by:
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where rt is a tariff rate imposed by the government and whose revenue is rebated to the households in a lump sum fashion.1 We assume for now that rt is constant over time.
The real wage in this economy is a weighted average of the two product wages, wa and Wb, which is the real wage measured in units of good b:
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If momentary utility from consumption of goods a and b (Ca, and Cb) had the Cobb-Douglas form и = l(C2Cl~y)1~cr — 1]/(1 — a), the real wage (deflated by the consumer price index) would be a geometric average of the two product wages: u^”7. Since we want to be agnostic about the weights used in the construction of the consumer price index, we analyze separately the evolution of both wa and wb.

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This assumption is just a normalization that means that the economy has a comparative advantage at producing good a.
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Denote the number of incumbents in sector % by Mit. Using the adding up condition for labor,
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Note that when the economy specializes in good a, so that Mb — 0, the variable в is still well defined since it gives us the ratio of labor employed by a type a firm relative to the labor employed by a potential entrant into the b sector. When Mb = 0 equation (2.6) implies that the available labor is evenly divided among sector a firms. The values of 7ra and тгь are:
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