Question:
Suppose that the preference of country A and country B differs, but that each is inflexible: country A consumes food and clothing in proportion 2:1 (at any prices), while country B always consumes food and clothing in equal proportions (1:1). The two countries have identical bowed-out production possibilities frontier. What happens to country A's terms of trade if it makes a consumption loan to country B? Is there a secondary burden of the loan?