In this chapter, we saw that financial market integration is necessary for countries to smooth consumption through borrowing and lending. Consider two economies, Albania and Austria. Both are former Communist-bloc countries that have pursued policies to privatize businesses and open financial markets. However, Austria began this process roughly 10 years earlier than Albania. For each of the following shocks, explain how and to what extent each country can use diversification to smooth consumption.

a. Floods in Austria destroy a portion of the capital stock.

b. Albania experiences an influx of labor from the former Yugoslavia during the war in Kosovo.

c. Both Albania and Austria experience a decrease in exports because of a recession in Italy.