Indonesia’s GDP is $200 billion per year, and Indonesia’s interest rate is constant at 10%
i) 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.
ii) 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?