Chamberlinian-Ricardian trade patterns
Assuming that the products are transported at no cost between countries, the prices of each product in two countries are equal. Therefore, the demand functions for Foreign consumers are
d˜ ig = pig 1_____θ – 1 w˜L˜_________M(P)θ/(θ – 1) where g = k, k˜. (18.4)
Differentiated products are supplied by monopolistically competitive firms. There is cross-country technical heterogeneity: each Home (Foreign) firm in industry i has both α i (α˜ i) units of labor as a fixed input and β i (β˜ i ) units of labor as a variable input. With the number of firms being very large, the elasticity of demand for each product becomes σ. Thus, each product is priced at a mark-up over marginal cost:
pik = σβw______(σ – 1), p
σβw˜______(σ – 1).