(Question 1 Consider the gains from international financial globalisation in Chapter 6 of Feenstra and Taylor discussing the benefits of nisk diversification. There are two countries, differently affected by climate change. Country A 1s experiencing more volatile weather patterns than country B, but 1s more wealthy. Each country has an average output of 15 per year and desires to smooth consumption. All income takes the form of capital income and 1s fully consumed in each period. I(a) Consider two states of the world: normal weather and extreme weather. Each happens with equal probability (50%). The economies in each state of the world can be summarised below: s Qs 0000000005 000000000 Compute the income from three portfolios: (1) 100% specialisation in Country A capital, (2) 100% specialisation in Country B capital, and (3), 50% split in each country's capital. 1(b) Is there any scope for gains from diversification in this case? Why, or why not? I{c) What 1f country B 1s a developing economy and has a much higher share of labour income, say 50% income goes to labour. How does this affect your answers to 1(a) and 1(b) capital portfolio returns you computed 1n question 1(a). I(d) Can you think of some reasons why this nsk diversification might not happen as it relates to clhimate risks