1. Explain using a model why the US might have a trade deficit.
2. What does the US's age profile have to do with the trade deficit? Explain consumption smoothing in your answer.
3. Set up and explain the Krugman Model

a. First highlight the two main facts that are unexplained by the previous trade models.

b. Next, write down the assumptions of the model.

c. Explain where demand for differentiated goods comes from.

d. Explain the role of the fixed cost in production - what does it "counter-balance"?

e. Explain how free entry operates to find the equilibrium.