Suppose a small, relatively poor country decides to pursue trade and financial sector liberalization, opening up its economy to international transactions with the rest of the world in goods, services, factor services and assets. Assume it will follow a fixed exchange rate regime.
a) What are the potential benefits and potential costs for this country of opening up to trade?
b) If you observed this country initially experience current account deficits and capital account surpluses when it opened up to trade, would you be surprised and why (or why not)? Under what conditions would the deficits be "sustainable"?
c) What would you expect to happen to the prices of tradable goods that the country produces relative to world prices, and of its assets, when it opens up to trade and why?d) Suppose that, initially upon opening up to trade, the country experiences a balance of payments deficit that is attributable to a current account deficit that is inadequately funded by foreign lenders. Why might foreign investors be wary of holding the assets of this country? How would this balance of payments deficit be funded? Explain carefully.