A guide to the very basics of Dixit-Stiglitz


Are you starting a (graduate) course in international trade this fall? If so, you’ll soon be encountering the so-called Dixit-Stiglitz CES function, a demand system that underlies trade economists’ work on everything from the gravity equation to the organization of multinational enterprises.

Because the specification is so popular, economists frequently skip to its well-known results, like consumers’ Marshallian demand functions and firms’ pricing strategies, without deriving them. And professors introducing the topic sometimes ask students to derive the results without giving them much guidance.

Here’s my introductory guide to the Dixit-Stiglitz demand system. It walks through the most basic derivations step-by-step, in hopes of helping those students so frustrated with wading through tedious algebra and integrals that they’ve turned to Google searching for a very basic introduction to Dixit-Stiglitz lite.

Comments and corrections (!) are most welcome; my email address is on the first page of the pdf.