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I'm studying the graduate international trade lecture notes by Treb Allen and Costas Arkolakis posted on their personal homepage. The first chapter covers the Armington model. After deriving the gravity model, Allen suggests that "the quantity demanded of a good increases with the price index." I don't understand why this is the case.

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If the price index $P_j$ rises with $p_{ij}$ held constant, then it must be because the prices of goods other than $i$ have risen. Since the goods are substitutes, demand for good $i$ will rise.

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  • $\begingroup$ Thank you very much for your answer! $\endgroup$ Commented May 14 at 7:55

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