There are three types of imports in the model: imports to intermediate demand (MIir), imports to public sector demand (MGir) and imports to final consumer demand (MCir). The maintained assumption is that while the aggregate import share may differ between these three functions, each of these shares have the same regional composition within the import aggregate. A CES aggregation across imports from different regions s forms the total import composite:
Two tax margins and a transportation cost apply on bilateral trade in the model. Real transport costs are proportional to trade:
and these inputs are defined by a Cobb-Douglas aggregate of international transport inputs supplied by different countries:
It is helpful to think of international transportation margins as transportation services which are provided by perfectly competitive producers from different regions with an Armginton aggregation across services from different countries and an elasticity of substitution equal to unity. The technology providing transportation services exhibits constant returns to scale, so we can specify a price pT representing the unit cost of transportation on all commodity trade flows.9
Bilateral trade flows are determined by cost-minimizing choice, given
the fob export price from region r, pirX, the export tax
rate, tirX, and the import tariff rate,
tirM.10 We then may write the demand for bilateral imports
as:
