Mechanism of a Downward Price-Setting Curve Shift from Higher Import Costs
According to the WS-PS model, when firms face rising import costs, they protect their profit margins by passing these costs on to consumers through higher prices. This action means that a larger share of the value of output per worker is claimed by foreign suppliers. As a result, the real wage that firms can offer at any employment level is reduced. This reduction is represented graphically as a downward shift of the price-setting (PS) curve, which opens up a bargaining gap.
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