Consider a country of which initial wealth is zero, and its consumers prefer consumption smoothing. The value of output is initially $1 billion. The world real interest rate is 5% and the inflation rate is zero. There is an investment opportunity which costs $300 million for two periods, and after that it increases output by $40 million every year.
- Is the investment opportunity worthwhile? Explain your reasoning.
- Calculate consumption and trade balance if this investment opportunity is pursued.
- Calculate net factor income account, current account and external wealth if this country pursues this investment opportunity.