The price index equations (25) as noted before have an important property. The regional
manufacturing price index will tend to be lower, the higher is the share of effective
manufacturing labour in the region, since more varieties are produced locally without
incurring therefore in transport costs (price-index effect).
The total regional income Yi is given by the sum of all farmers and workers wages
Y = Wi L1 + (1 — μ ) / 2
(27)
Y2 = w 2 L2 + (1 - μ )/2
where 1-μ is the world population of immobile farmers.
Real wages are obtained by deflating nominal wages by the regional cost-of-living index
Piμ (PA )1 μ . As the agriculture product is the numeraire, the index can be simplified to Piμ .
We assume that workers are paid linearly according to their level of skill si; consequently the
real wages, ( (∣'λ, (∣'λ respectively for low- and high-skilled workers) are:
u^u
ω1
w1
pμ
1 1
(28)
ω = w1[1 + ( ŋ' ]
1 P1μ
ω2 =
(29)
20
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