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Income. II Income is earned through the sale of factors of production. Each household devotes income to the goods produced by the 19 sectors of the economy and to savings. Total consumption for each household class is given by: C = (I - s) Y where s denotes the marginal propensity to save and Y the household disposable income. The consumption for each good is then the share of this total consumption devoted to each good: Ci = (wiC)/p[ where Wi denotes the share spent on good 1 and C is total consumption from. In classical trade theory, for a small open economy (SOE) there is an assumption concerning prices of traded goods that is sometimes referred to as "the law of one price" . Traded goods are assumed to be perfect substitutes independent of the geographic area of production, the implication being that prices are independent of region of production. Since regions are observed simultaneously importing and exporting the same "good," the law of one price is probably not an accurate reflection of price fonnation in the SOE. That is, domestic and imported goods are likely to be imperfect substitutes, especially in cases with the levels of aggregation commonly used in applied work. As an approach, Armington (1969) postulated a weighted price fonnation mechanism in which the domestic price of a good is generated by a function that applied weights to the fraction of the regional consumption of the good that domestically produced and the fraction imported into the region. In constructing the CGE model for this study, the SOE assumption was used as the basis for constructing the model of the seven states region. This well-developed approach has the advantage of fairly modest data requirements while maintaining theoretical soundness. The linkages between the regional economy and the rest of the world are maintained through the II The baseline income levels are (1982$). / 18