# answer 3 - Solutions Chapter 6(17) Balance of Payments I:...

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Therefore, the country’s initial external wealth,W0(1r*)W1, is equal tothe present value of the country’s future trade deficits.d.How would the expressions in (a) and (b) change if the economy had net laborincome (positive or negative) to or from abroad or net unilateral transfers? Ex-plain briefly.:
3.In this question, assume all dollar units are real dollars in billions, so \$150 means \$150 bil-lion.It is year 0. Argentina thinks it can find \$150 of domestic investment projectswith an MPK of 10% (each \$1 invested pays off \$0.10 in every later year). Argentinainvests \$84 in year 0 by borrowing \$84 from the rest of the world at a world real in-terest rater*of 5%. There is no further borrowing or investment after this.Use the standard assumptions: Assume initial external wealthW(Win year1) is 0.AssumeG0 always; and assumeI0 except in year 0. Also, assumeNUTKA0 and that there is no net labor income so thatNFIAr*WThe projects start to pay off in year 1 and continue to pay off all years thereafter. In-terest is paid in perpetuity, in year 1 and every year thereafter. In addition, assume thatif the projects arenotdone, thenGDPQC\$200 in all years, so thatPV(Q)PV(C)200200/0.054,200.a.Should Argentina fund the \$84 worth of projects? Explain your answer..
b.Why might Argentina be able to borrow only \$84 and not \$150?
c.From this point forward, assume the projects totaling \$84 are funded and com-pleted in year 0. If the MPK is 10%, what is the total payoff from the projects infuture years?

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