It has been documented that as societies age, the demand for personal and health-care services, prime...

 

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It has been documented that as societies age, the demand for personal and health-care services, prime examples of nontradable goods, increases. To capture this phenomenon, suppose that there is an increase in households' preference for nontradable goods, which is reflected in an increase in 1-y, the exponent on nontradable consumption in the Cobb-Douglas function that aggregates consumption of tradable and nontradable goods (Equation 9.2). Use the TNT model studied in lecture 9 based on Section 9.1 of the S.U.W. text to answer the following questions: a. (5 points) What is the effect of this preference shock (decrease in y or increase in 1-y) on the equilibrium consumption of tradable goods in periods 1 and 2? Explain. (Hint: You are given the expression of CT, which is equation 9.9. Derive the expression of C (3 points). See how/whether y or 1-y enters the expressions.) b. (5 points) What is the effect on the trade balance and the current account in periods 1 and 2? Explain. c. (6 points) Use a graphical approach to analyse the effect in period 1 of the preference shock on the relative price of nontradables and the real exchange rate. d. (4 points) The old-age dependency ratio is defined as the ratio of the number of people aged 65 or older to the number of people aged 15 to 64. Which countries would you expect to be more expensive to live in: countries with high old-age dependency ratios or countries with low old-age dependency ratios? Briefly explain your answer. It has been documented that as societies age, the demand for personal and health-care services, prime examples of nontradable goods, increases. To capture this phenomenon, suppose that there is an increase in households' preference for nontradable goods, which is reflected in an increase in 1-y, the exponent on nontradable consumption in the Cobb-Douglas function that aggregates consumption of tradable and nontradable goods (Equation 9.2). Use the TNT model studied in lecture 9 based on Section 9.1 of the S.U.W. text to answer the following questions: a. (5 points) What is the effect of this preference shock (decrease in y or increase in 1-y) on the equilibrium consumption of tradable goods in periods 1 and 2? Explain. (Hint: You are given the expression of CT, which is equation 9.9. Derive the expression of C (3 points). See how/whether y or 1-y enters the expressions.) b. (5 points) What is the effect on the trade balance and the current account in periods 1 and 2? Explain. c. (6 points) Use a graphical approach to analyse the effect in period 1 of the preference shock on the relative price of nontradables and the real exchange rate. d. (4 points) The old-age dependency ratio is defined as the ratio of the number of people aged 65 or older to the number of people aged 15 to 64. Which countries would you expect to be more expensive to live in: countries with high old-age dependency ratios or countries with low old-age dependency ratios? Briefly explain your answer.

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a The effect of the preference shock on the equilibrium consumption of tradable goods in periods 1 a... View the full answer