The balance of payments (BOP), also known as balance of international payments, summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country. These transactions consist of imports and exports of goods, services, and capital, as well as transfer payments, such as foreign aid and remittances. A country's balance of payments and its net international investment position together constitute its international accounts. The balance of payments divides transactions in two accounts: the current account and the capital account. Sometimes the capital account is called the financial account, with a separate, usually very small, capital account listed separately. The current account includes transactions in goods, services, investment income, and current transfers. The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments. The current account is included in calculations of national output, while the capital account is not. ? Look into the data of Afghanistan from Trading Economics/UNCTAD?WITS/UNCOMTRADE/WORLD BANK) and prepare the BOP sheet of Afghanistan from 2015-2019? b)Discuss these arguments in light of political economy of trade policy, externalities and development? ? Articulate arguments for free trade that go beyond the conventional gains from trade. ? Explain how international negotiations and agreements have promoted world trade in Afghanistan context. ? Discuss the special issues raised by preferential trade agreements signed by Afghanistan in SAFTA.

Section B.

Exercise 4.2 (Anticipated Terms-of-Trade Shock) Consideretwo-period small open endowment economy populated by a large number of households with preferences given by the lifetime utility function V 0102: where Cl and 02 denote consumption of food in periods 1 and 2, respectively. Suppose that households receive exogenous endowments of copper given by Q; = 02 = 10 in periods 1 and 2, respectively. The terms of trade in periods 1 and2 areTT1 =TI'2=1. Everyhouseholdentersperiod 1 with no assets or liabilities inherited from the past, 3.; = 0. Finally, suppose that the country enjoys free capital mobility and that the world interest rate on assets held between periods 1 and 2, denoted r', is 5 percent. 1. Compute the equilibrium levels of consumption. the trade balance, and the current account in periods 1 and 2. 2. Assume now that the terms of trade in period 2 are expected to increase by 50 percent. Calculate the effect of this anticipated terms of trade improvement on consumption, the trade balance, and the current account in periods 1 and 2. Provide intuition. Consider a twoperiod small open economy populated by a large number of households with preferences described by the lifetime utility function Inwfbf") + 111(ch 03' ) where C? and ng , for t : 1, 2, denote consumption of tradable and nontradable goods in period t, respectively. Households are endowed with if : 1 and Q; = 2 units of tradables and Q? : Q? : 1 units of nontrad- ables in periods 1 and 2. Households start period 1 with no assets or debts. The world interest rate is zero. 1. Calculate the equilibrium levels of the current account and the rel ative price of nontradables in terms of tradables in period 1, denoted CA1 and 391, respectively. 2. Suppose now that suddenly the world interest rate increases from 0 to 10 percent. Calculate the new equilibrium levels of the current account and the relative price of nontradables in terms of tradables in period 1. Page 3 Question 2 Consider a twoperiod economy populated by many' identical househoids whose preferences are described by the utility function in C1 + ii in C; . where C; and E\"; denote consumption in periods 1 and 2. ,8 parameter representing the subjective discount factor. Assume that consumption is a composite of tradable and non-tradable goods described by the Cobb-Douglas aggregation technologies: C; = (CI )'TCI" )1". where C? is the consunption of tradable goods and Cf" Is the consumption of non-tradabie goods. y is a parameter defining the relative importance of h'adabie consumption in utility. Suppose that the household is endowed with Q? and 09" units of tractable and nontradabie goods in periods t = 1. 2. Households start period 1 with no debt or assets. in period 1. households can borrow or tend through a bond, denoted 31. denominated in units of tractable goods and paying the interest rate r in period 2. The budget constraint of the household in period 1 is then given by PIC? + Prcl\" + i'f'ii'1 = PIT I+ Ff" i\". where P13" and Pf" denote the prices of tredable and nontradable goods and B, is the stock of the bond. The optimality conditions are the toliowing: 65' = 19(1 + eat\" and c\" = 1 _ YC'T 1" Pt Where 35': is relative price of nonutradable goods. A) What is the effect of an improvement In the counter terms of trade on the equilibrium relative price of tradable goods? What is the intuition behind it? [10 merits] B} What is the effect of an increase in the endowment of tractable goods in period 1 on equilibrium relative prices of non-tradable goods and on the real exchange rate