1. (A Two-Sector Economy with Linear Technologies) This exer- cise combines the TNT and Balassa-Samuelson models. Consider a two-period small open economy populated by a large number of iden- tical households with preferences described by the utility function InCT + InCN + InCT + InCN where CT and C2 denote consumption of tradables in periods 1 and 2, respectively, and CY and C2 denote consumption of nontradables in periods 1 and 2. Households are born in period 1 with no debts or assets and are endowed with L1 = 1 units of labor in period 1 and L2 = 1 units of labor in period 2. Households offer their labor to firms, for which they get paid the wage rate wj in period 1 and w2 in period 2. The wage rate is expressed in terms of tradable goods, that is, wt = Wt/ Pt . Households can borrow or lend in the international financial market at the world interest rate r*. Let p1 and p2 denote the relative price of nontradable goods in terms of tradable goods in periods 1 and 2, respectively. Firms in the traded sector produce output with the technology Qf = aT LT in period 1 and Q? = aT L? in period 2, where Q? denotes output in period t = 1, 2 and L, denotes employment in the traded sector in period t = 1, 2. Similarly, production in the nontraded sector in periods 1 and 2 is given by QN = aN Ly and QN = aNLN