In this question, assume all dollar units are real dollars in billions, so, for example, $100 means $100 billion. It is year 0. The country Malaysia thinks its domestic investment projects have a marginal product of capital (MPK) equal to 10% (each $1 invested in year 0 pays off $0.10 in every later year). Malaysia now invests $100 in year 0 by borrowing $100 from the rest of the world at a world real interest rate r of 5%. There is no further borrowing or investment after this. =
Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G=0 always; and assume I = 0 except in year 0. Also, assume NUT = KA = 0 and that there is no net labor income so NFIA = r*W .
The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year 1 and every year thereafter. In addition, assume that if the projects are not done, then GDP = Q = C = $200 in all years, so that PV(Q) = PV(C) = 200+ 200/0.05 = 4,200. =
Regarding Malaysia’s balance of payments, what happens to the levels of CA, TB, NFIA, and FA in year 0 and every subsequent year.
