Edited by Jeroen C.J.M. van den Bergh
Chapter 6: International Trade and Natural Resources
Ngo Van Long 1. Introduction There are two streams of literature on the role of natural resources in international trade. The first stream deals with the short-run macroeconomic consequences of a resource boom. The second stream is in the tradition of the pure theory of international trade: it focuses on long-run issues and abstracts from macroeconomic adjustment problems such as changes in the exchange rates, inflation, unemployment and balance of payments disequilibrium. Corden (1984) provides a useful survey of the first stream of literature. He shows how a country experiencing a resource boom (caused by increased international demand andlor price for its natural resources, or by new discoveries of deposits) can, as a consequence, suffer from an illness called ‘de-industrialization’, that is, the demise of the manufacturing sector. He explains this in terms of two effects, the spending effect and the resource movement effect. The former operates in the same manner as an income transfer. At given relative prices, the higher income brought about by the resource boom results in an excess demand for non-traded goods. This causes a rise in non-traded goods prices relative to traded goods prices; this is called a ‘real appreciation’. The result is the contraction of the nonresources traded goods sector. This effect is reinforced by the resource movement effect if the booming natural resource sector requires significant inputs which must be bid away from the other sectors. If the wage rate is not flexible, and if labour mobility is limited, the spending effect may...
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