Sorry if this question seems fragmented; I have minimal background in economics, I just grabbed some notes and began studying.

The scenario is given as: "Suppose Germany needs to make a 1 billion dollar payment to France. Keyesians thought that there is no general equilibrium effect; the burden to Germany is just 1 billion. However, if consumption is home-biased, then relative demand for French goods will increase, which deteriorate the terms of trade for Germany. This in turn will imply the burden for Germany is more than 1 billion dollars."

I'm not understanding the bold parts:

  1. Does Ricardian theory place a number on how much more the burden is in excess of 1 billion?
  2. Does worse mean a decrease? Ie export prices down, import prices up.
  3. How does home-biased consumption result in higher demand for French goods? Is it saying consumption is home-biased for BOTH countries (Germans prefer German goods, French prefer French goods)? And/or is it saying EVERYONE will demand French goods (both German and French households will increase demand for French goods)? They tried to explain using the formula given previously in the notes: $$ \theta(\tilde{z})w^*L^*=(1-\theta(\tilde{z}))wL $$ Where $\theta(\tilde{z})$ is the proportion of home country's income spend on good $z$, $w$ is wage, $L$ is labour amount and the asterisk denotes the foreign country. They said if home-bias exists then $\theta(z)^*>\theta(z)$ but doesn't go on to explain what that means for the equation. Plus the * is confusing because this is true in either Germany or France's perspective, so I'm not sure who's perspective to use for the equation.
  • $\begingroup$ This has almost nothing to do with basic Ricardian theory, this is the more advanced topic of biased growth. $\endgroup$ – Giskard Apr 6 at 20:09
  • $\begingroup$ Also, you are talking about confusing notes without linking them. We cannot divine the exact contents of the notes. $\endgroup$ – Giskard Apr 6 at 20:10
  • $\begingroup$ Yea I figured I just give it a shot...I knew it'd be hard to answer. I was just reading MIT OpenCourseware notes; they had this under the Ricardian lectures. $\endgroup$ – Five9 Apr 7 at 16:18

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