Problem
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.
• 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.
• 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?