The name is absent

where tɑð e ^,R,^κ is the vector of tariffs applied to goods originating in country a and whose final
location is country b. It is clear from equation (1) that country H selects tarifs t_WH on goods
acquired from country W, which may differ from country F's tarifs on products originating in
the same location, t_WF. The duties on products imported by one union member from the other
are zero, t_HF = t_FH = 0 e ^rR,^κ. Throughout the paper we use subscripts to describe the location
of origin and the final location in the same way we did with the vector of tarifs.

What do world prices mean in this framework? Dixit (1985, pp. 317) argues that world
prices “denote trading prices just outside the home country’s borders.” This is the definition we
use in this paper as well. Dixit (1985) goes on to say that world prices for non-tradeables can
be set arbitrarily. Our framework adopts the convention that the world price of non-tradeable
goods (i.e., goods not traded between countries) matches the price that prevails in the FTA. This
implies that zero duties on trade are applied to non-traded goods. That does not cause harm
since the relation between FTA and world prices for non-tradeable commodities is irrelevant.

Assume that endowments are constant throughout the analysis. Country i's production vector
is y^l eY^г C X^9κ, i = H, F. A positive component of y^l is an output and a negative element
is an input. The consumption vector of country i is x^l e X^г C X^9κ, while the consumption
vector of consumer j of country i is xj ε Xj C X^{9 κ}. The external trade vector of country i is
denoted by z^l e X^9κ. A positive element of z' is an imported good and a negative element is an
exported good. Many coordinates of the vectors x^j, y^j, and z' will be zero. For example, external
trade in goods produced and consumed in the same country is zero. Firms located in country H
could “produce” a good of type WFk (good of description k, physically originating in W, with
end-of-period location F) by acquiring good k from W and transporting it to F. In this case, one
element of y^H would be the input, — y_WWk, and another element would be the output, y_WFk.
Whether goods are subject to tarifs depends on their origin and the degree of transformation

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