Consider a two-period open economy with endowment income as in class, with slight modification: economy produces a constant amount of output Y every period, but its international price Pt varies between periods. The price of the consumption good is normalized to 1 throughout. So think about this economy as a country that produces only oil, which it sells in the international market at volatile price, and then buys consumption goods from abroad. The price Pt is then called the terms of trade - price of export relative to the price of import. The budget constraint is then 1 +1/(1+)*2 = 1 + 1/(1+)*2*, where r is once again the exogenous world interest rate. The utility function is logarithmic: u(c) = lnC, the discount factor is , which in general is not equal to r