International Economics 10th Edition by Paul Krugman,Maurice Obstfeld ,Marc Melitz

Exercise 4

The counterpart to immobile factors on the supply side would be lack of substitution on the demand side. Imagine an economy where consumers always buy goods in rigid proportions-for example, one yard of cloth for every pound of food-regardless of the prices of the two goods. Show that an improvement in the terms of trade benefits this economy as well.