Question
Heckscher-Ohlin Model and Intertemporal Trade. There are two countries, Brazil and Saudi Arabia, and two goods, consumption today (Cp) and consumption tomorrow (Cf). Assume Saudi
Heckscher-Ohlin Model and Intertemporal Trade. There are two countries, Brazil and Saudi Arabia, and two goods, consumption today (Cp) and consumption tomorrow (Cf). Assume Saudi Arabia "exports" current consumption", and Brazil "exports" future consumption.
a)Which country is a net lender today? Net borrower today? What does that mean in terms of capital flows between these two countries today? And in terms of their current accounts today?
b)Graph the intertemporal production possibilities frontier for Brazil under the assumption above. Toward which good is Brazil's PPF biased? Y-axis: Cf X-axis: Cp
c)If the world interest rate were r, show, on the graph above, how much current consumption (Cp) and future consumption (Cf) Brazil would produce. Label these quantities q1p and q1f.d)Show how much current consumption (Cp) and future consumption (Cf) Brazil consumes on the graph above. Label these quantities d1p and d1f. Draw as many indifference curves as you need to.
e)If the world interest rate increases, show, on the graph above, how the production of current consumption (Cp) and future consumption (Cf) would change in Brazil. Label these quantities q2p and q2f.
f)Show how much current consumption (Cp) and future consumption (Cf) Brazil consumes now that the world interest rate in higher (i.e. the "terms of trade" have deteriorated for Brazil). Label these quantities d2p and d2f. Draw as many indifference curves as you need to.
g)Did the change in the world interest rate, increase or decrease, welfare in Brazil? h)What happened with the current account and net capital flows today in Brazil after the world interest rate increased?
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