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    secondary burden of consumption loan.

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    2. 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?

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    Solution Preview

    Please see the attached file.


    Country A consumes food & clothing in proportions 2:1, the opportunity cost of food & clothing will be as follows.

    Opportunity cost of food = ½ cloth

    Solution Summary

    Will there be a secondary burden of consumption loan?