Chapter 6
The present value is today's value of a future cash flow or flows.
Output will equal consumption in a closed economy with temporary shocks.
Russia's risk premium was 11.3%.
When shocks are perfectly symmetric, risk cannot be eliminated by holding the world portfolio.
In an open economy, external borrowing is possible.
Technical efficiency is a more narrow measure of efficiency.
When shocks are perfectly negatively correlated, they have a correlation of −1.
A perpetual loan is an interest-only loan or, equivalently, a sequence of loans for which only the principal is refinanced or rolled over every year.
In a closed economy, external borrowing is not possible.
Nigeria's risk premium was 12.6%.
When shocks are perfectly asymmetric, the world portfolio has minimum volatility and it is equal to zero.
Consumption will be smooth in an open economy with no shocks.
When shocks are perfectly symmetric, the volatility of the portfolio is not affected by diversification.
Consumers can smooth out temporary shocks but they must adjust immediately and fully to permanent shocks.
θ is the elasticity of output with respect to capital.
Consumption must change by the amount of the output shock in all years if a permanent shock occurs.
Consumption will be volatile in a closed economy with temporary shocks.
When output fluctuates, a closed economy cannot smooth consumption, but an open one can.
Sovereign wealth funds are state-owned asset management companies that invest some government savings overseas.
Investment should be undertaken as long as MPK is greater than the world real interest rate.
The long-run budget constraint is the key constraint that limits a country's borrowing in the long run.
A sudden stop is when a borrower country sees its financial account surplus rapidly shrink and so the current account deficit also must shrink.