(A) Explain the Dornbusch-Fischer-Samuelson (DFS) Model of Classical-Type Trade Between

question 9

Essay

(a) Explain the Dornbusch-Fischer-Samuelson (DFS) model of Classical-type trade between two countries in a very large number of goods. Be sure to describe why each curve slopes as it does, and indicate the trading pattern at the equilibrium position.
(b) Now suppose that, from your equilibrium position in part (a) above, there is a uniform improvement in labor productivity in one of the two countries in all industries. (You can choose either country.) Illustrate and explain what happens to the trading pattern and to relative wage rates. Then explain the impact of the productivity improvement on real income in each country.

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