same fashion, 𝑃𝐼𝑖 and 𝑃𝐼 ∗ are local currency prices paid by the importers in country i

and ROW, respectively. Exogenous variables were defined as income levels in

country i (𝑌𝑖 ) and in ROW (𝑌 ∗ ), prices of locally produced items in country i (𝑃𝑖 ) and

ROW (𝑃∗ ), the trade barriers such as tariffs and subsidies to import and exports in

country i (𝑇𝑖 , 𝑆𝑖 ) and ROW (𝑇 ∗ , 𝑆 ∗ ), and the exchange rate represented by (e).

The features of this model are:

 Consumers maximize utility subject to a budget constraint.

 When dealing with aggregated imports and exports, it is common that

inferior goods and domestic complements for imports are removed from

consideration by assuming positive income elasticities (f1 g1) and cross

price elasticities of demand (f3 g3); naturally negative own price elasticity

(f2 g2) are expected.

 No money illusion, there is no effect on demand by changing income and

prices by the same proportion, that is f1 +f2+f3=0 and g1+g2+g3=0.

 𝐼𝑖𝑑 = 𝑔[(𝑌𝑖 /𝑃𝑖 ), (𝑃𝐼𝑖 /𝑃𝑖 )] is the homogeneity of demand, where its

arguments are real income (𝑌𝑖 /𝑃𝑖 ) and relative prices (𝑃𝐼𝑖 /𝑃𝑖 ).

It is often the case, in practice, that infinite export supply price elasticities are

assumed, and thus the eight equations above representing the imperfect substitutes

model can be reduced to a single equation. Equalizing export demand and export

supply as in equation 3.7 above 𝑓(𝑌 ∗ 𝑒, 𝑃𝑋𝑖 , 𝑃∗ 𝑒) = ℎ[𝑃𝑋𝑖 (1 + 𝑆𝑖 ), 𝑃𝑖 ] and assuming

that there are no subsidies so that 𝑃𝑋𝑖 (1 + 𝑆𝑖 ) on the left hand side becomes 𝑃𝑋𝑖 ,

then imperfect substitutes can be expressed as:

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