<p>If the price index <span class="math-container">$P_j$</span> rises with <span class="math-container">$p_{ij}$</span> held constant, then it must be because the prices of goods other than <span class="math-container">$i$</span> have risen. Since the goods are substitutes, demand for good <span class="math-container">$i$</span> will rise.</p>

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2024-05-14T07:55:17.103Z
Thank you very much for your answer!
lidoor kulow
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2024-05-12T12:38:47.640Z
2024-05-12T12:38:47.640Z
smcc
<p>I'm studying the graduate international trade lecture notes by Treb Allen and Costas Arkolakis posted on their personal homepage. The first chapter covers the Armington model. After deriving the gravity model, Allen suggests that &quot;the quantity demanded of a good increases with the price index.&quot; I don't understand why this is the case.</p>
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<microeconomics><international-trade><international-economics>
Why does an increase in the Dixit-Stiglitz price index lead to an increase in demand?
lidoor kulow
# Why does an increase in the Dixit-Stiglitz price index lead to an increase in demand?

(Asked by: username_0 on 2024-05-12)

I'm studying the graduate international trade lecture notes by Treb Allen and Costas Arkolakis posted on their personal homepage. The first chapter covers the Armington model. After deriving the gravity model, Allen suggests that "the quantity demanded of a good increases with the price index." I don't understand why this is the case.

[![enter image description here](https://i.sstatic.net/BOg2Er4z.png)](https://i.sstatic.net/BOg2Er4z.png)

**Tags:** microeconomics, international-trade, international-economics

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## 1 answers

### Answer by username_1 on 2024-05-12. Score: 0 | Accepted answer

If the price index $P\_j$ rises with $p\_{ij}$ held constant, then it must be because the prices of goods other than $i$ have risen. Since the goods are substitutes, demand for good $i$ will rise.

> **Comments:**
> **username_0**: Thank you very much for your answer!  

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