El diamante de la ventaja competitiva nacional

We define the relative equivalent variation to be the relative increase in income, ( sh=s_h)^eq, that a worker h must receive to raise her utility level from the equilibrium utility U_h to

the target utility level Uh taking as given the equilibrium price system p (!), ! 2 and its product space . By (33), we can write worker h’s indirect utility as

V_h(s_h) = price index. Then, a relative increase in income s_h=s_himplies an income change from sh

to sh+ s_h, which yields a change in utility level such that Inverting this expression, we obtain

s_h

s_h+ P_h = exp U_h U_h

j hj 1

Using the definition ofpb_h(sh), the relative equivalent variation can be expressed as s_h

The low income consumers havepb_L(s_L) = pb_L while, under Pareto productivity distribu-tions, the mass of varieties is given by j Lj = MG(bc) [1 + (n 1) ]. Then, their relative equivalent variation is given by the following formula:

s_L Note that for small utility differences, we can approximate relative equivalent variations

as s_h

s_h

eq

' pb_h

s_h (Uh U_h), h = L; H

Equivalent variations are proportional to utility differential and income group’s choke price. Since pb_H > pb_L, a same rise in utility requires to give a larger increase in income

to the higher income consumer because their marginal utility of consumption is lower.

Finally, note that equivalent variations are partial equilibrium concepts because prices are fixed although they vary in our general equilibrium framework.

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