I. Gains from Financial Globalisation Indonesia\'s GDP is $200 billion per year,
ID: 1162536 • Letter: I
Question
I. Gains from Financial Globalisation Indonesia's GDP is $200 billion per year, and Indonesia's interest rate is constant at 10% 1. In year 1 Indonesia is hit by a tsunami which causes its income from tourism to drop this year by $110 billion, to only $90 billion. Income will recover back to $200 billion in all subsequent years. What will be the path of Indonesian consumption if Indonesia has no ability to borrow in international capital markets? 2. Assume Indonesian consumers aim to perfectly smooth consumption across all future years and are able to borrow at an interest rate of 10% from foreigners. Calculate Indonesia's consumption and trade balance in the year of the tsunami and subsequent years 3. In the year after the tsunami (year 2) Indonesia discovers massive oil deposits offshore. Accessing the oil will require an investment of $100 billion. If exploited, on current projections of oil prices the oil deposits could yield an income of $20 billion a year indefinitely, beginning in the year following the investment. Would it be profitable for Indonesian firms to invest in developing the oil fields? 4. If Indonesian firms have access to international capital markets at an interest rate of 10%, calculate the path of Indonesia's, output, consumption and trade balance in year 2 and sub sequent years 5. In year 1 Indonesian acquired substantial foreign debt as a consequence of the tsunami leading international lenders to worry that they might not be repaid. If foreigners demand an interest rate of 25% to extend additional loans to Indonesia to finance oil exploration, but Indonesian firms can continue to borrow from Indonesian consumers at an interest rate of 10%, calculate Indonesian consumption and output in year 2 and subsequent years. 6. Assuming Indonesia develops the oil deposits, at current oil prices, revenue from the oil fields would represent 10% of Indonesia's income. Given the high volatility of the oil price, this rep resents a significant source of volatility to aggregate Indonesian income. What international transactions could Indonesia undertake to reduce the volatility of its income?Explanation / Answer
Answer (i) : The indonesian consumpation has been decreased because there income has been reduced and spending power decreased but after subsquent year consumpation start increasing as income increases.
Answer (ii) As we know GDP includes various factors such as consumpation , investment as well as trade balance. Indonesian consumpation (in case of tsunami) has been assume to be $200 when there is no investment and trade balance is diffcult to find where as In subsquent years the consumpation is $200 and trade balance is diffcult to find in situation.
Year Investment Returns
1 -100 billion
2 $20 billion
Ans 3)- $20 billion
4 $20 billion
The cash flow continues indefinitely,
So NPV, = -150 + 20/(1.1) + 20/(1.1)2 + 20/(1.1)3 ............... infinite
= -150 + (20 + 20/(1.1) + 20/(1.1)2 + 20/(1.1)3 ........ infinite) -20
= -170 + 20/(1-1/1.1)
= -170 + 219.78 = $149.78
4) If indonesia can burrow from international market, to smoothens the consumption they will burrow
= (Consumption - GDP )
= ($190 - $180) = $10
5) From subsequent years indonesia can't burrow from international market, hence they will investment will be solely from domestic market, of
So Total investment = Domestic iNvestment = Savings
So Consumption = (GDP - Savings) = $200 - $20 = $180
6) International Trancaction to reduce the volatility = Half of toal investment = $10