Gains from Financial Globalization,

Consider the Inter-temporal Model with two time periods, t=0 and t=1.

Home is a small open economy that can borrow and lend in the first period at the world real interest rate of 5%.

In the first period, output is Y_o= 100 and in the second period Y₁= 90. The country wants to smooth consumption as much as possible.

The country ended period t=-1 with positive external assets,W_-1= 10.

What is the value of net factor income from abroad (NFIA) and the trade balance (TB) in t=0?

Answer:

NFIA = 0.5, TB = -0.5

NFIA = -0.5, TB = 0.5

NFIA = 0, TB = -0.5

NFIA = 0.5, TB = 0.5