Second, the factors of production a

Second, the factors of production are assumed to be endogenously determined, implying a perfectly elastic aggregate supply curve; as discussed in the previous section, any increase in output in this case can be accommodated without additional opportunity cost or displacement effects. As a result, there are no upward pressures on prices which could discourage increases in final quantity demanded or trigger substitution effects among goods and services or production factors. The marginal rate of substitution (at a consumption level) and the marginal rate of technical substitution (at a production level) are assumed to be constant; real wages are fixed as well as nominal and real exchange rates. The additional assumption of a small country with no buyer power enables the use of fixed world price of imports