Abstract. This study examines the impact of increased substitution elasticity between home and foreign tradable goods on firm location and macroeconomic variables. Using a two-country model, we show that deregulation in the tradable sector attracts producers to the home country and boosts local consumption and production, accompanied by currency appreciation. Although these consumption and production trends mirror those found in the non-tradable goods literature, our findings on firm relocation contrast sharply, revealing that tradable sector dynamics yield the opposite migratory effect.

Keywords: elasticity of substitution, deregulation, tradable sector, production location, exchange rate.