1. (The Terms of Trade and the Current Account) Consider the following chart showing commodity prices in world markets: I 'rice Commodity Period 1 Period 2 W' heat 1 1 2 In the table, prices of oil are e.xpr*sed in dollars per barrel and prices of wheat in dollars per bushel. Kuwait is a two-period economy that pro- duces oil and consumes wheat. Consumers have preferences described by the lifetime utility function where Cl and C2 denote, respectively, consumption of wheat in periods 1 and 2, measured in bushels. Kuwait's per-capita endowments of oil are 5 barrels in each period. The country starts period 1 with net financial assets carried over from period 0 worth 1.1 bushels of wheat (i.e., (1 + rn)130 1.1, with ro 0.1). There is free capital mobility and the world interest rate is 10 percent (r 0.1). Financial 'Leset,s are denominated in units of wheat. (a) What are the terms of trade faced by Kuwait in periods 1 and 2? (b) Calculate consumption, the trade balance, the current account and saving in periods 1 and 2 (expressed in bll.shels of wheat). (c) Answer the previous question assuming that the price of oil in the second period is not 2 but 1 dollar per barrel. Provide intuition. Hint: recall that the optimal allocation of consumption by households is invariant to increasing monotonic transformations of the lifetime utility fimction. So, for example, the utility function CIC2 implies the same optimal consumption path as the log-linear function InCl + InC,2.