Advances in Measuring Sustainable Development
INTRODUCTION1 This chapter explores empirically the effect of resource price trends on measures of income and saving. This is motivated by a basic intuition: if a country’s terms of trade are improving and can be expected to continue to improve – an exporter of increasingly scarce natural resources would be an example – then this country should be able to increase its consumption without harming its future prospects. Its Hicksian income, in other words, should increase as a result of these favourable trends. Sustained unfavourable trends, by the same reasoning, should decrease Hicksian income. Vincent et al. (1997) made this intuition precise for the case of optimal resource extraction in the face of exogenous resource price changes. They then examined the case of Indonesia empirically. In this chapter we offer several extensions to the work of Vincent et al. First, we develop an explicit model of income and saving in a small resourceexporting country where both resource prices and international interest rates vary exogenously. We then derive a precise formula for saving when resource prices grow at the exogenous international interest rate. Finally we present estimates of adjusted saving rates for roughly 100 countries by extrapolating signiﬁcant resource price trends for a range of natural resources. The model developed below extends, for non-autonomous economies, a result presented by Hamilton and Clemens (1999). We show that ‘genuine’ saving, suitably deﬁned, just equals the change in social welfare (present value of utility) measured in dollars. This provides the link between resource price...
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