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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:
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:
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.

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,
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: