(1)is the supply curve of traded goods; (2) is the demand curve for traded goods; (3) and (4) equate the implied demand for non-traded goods with the output of these, by market-clearing through PNT; (5) is the overall output identity; (6) is the national budget constraint in the absence of long-term loans – it forces the current account of the balance of payments into balance. For convenience, it ignores the payment of net interest to foreign residents that would result from the integral of past current account deficits (this would in fact lower domestic demand pro tanto), but our focus here is on the effects of the ERM and this element depends on demand policies pursued by the government – a separate issue, so we omit it (or equivalently, treat it as exogenous); (7) is the open economy supply curve. Its derivation assumes that non-traded goods are more labor intensive than traded goods and have a higher elasticity of labor demand to the product real wage.