everything makes sense if ϵI=0.77. That is, if the income elasticity of demand for manufactured goods is a little less than one. An elasticity less than one means that if your income goes up by 10%, your expenditure on manufactured goods rises by less than 10%. It goes up, but not by a similar percent. This income elasticity less than one acts a lot like the “demand shift” that DeLong dismisses in his first scenario. If you like, I’ve just given a very specific form to that demand shift.
Which is point (3) in my post on the puzzle.
Pointer from Mark Thoma.
DeLong was begging the question it seemed to me. Even if there is a high demand elasticity it doesn’t matter with outsourcing because we can assume there is a very high offshore supply elasticity, right? Is the basic idea behind “Buy American” to shift the domestic supply elasticity in a favorable direction? Interesting how Trump thinks he can affect the offshoring supply elasticity but hasn’t said anything about buying American.