1 Intertemporal Trade Present a brief explanation for why the theory of international capital markets can be recast as a theory of international trade over time. What are key differences between trade in goods and services as compared to the exchange of capital? What gains from international investment are there beyond those of intertemporal trade? What are the risks associated with intertemporal trade? Consider the effects of capital market integration. 1.1. An economy has an endowment of income of Ytoday and invests a strictly positive amount of that income Itoday for future consumption. Draw the economy's intertem- poral production possibility frontier and demonstrate today's consumption, today's investment, tomorrow's consumption, and tomorrow's income in a closed economy. 1.2. Now assume the economy has access to international capital markets at the world interest rate (1+r*). What will this do to the economy's consumption and investment decisions? Again, draw the economy's intertemporal production possibility frontier and demonstrate today's consumption, today's investment, tomorrow's consump- tion, and tomorrow's production in an open economy.