Resources and North-South Trade: A Macro Analysis in Open Economies

Chichilnisky, G. (1983). Resources and North-South Trade: A Macro Analysis in Open Economies. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-83-123

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Abstract

This paper explores the impact of resource export policies on the major macro variables of exporting and importing economies. Two regions, North and South, trade resources for industrial goods. Each region produces two goods with three factors: capital, labor and resources. The relative prices in the five factor and goods markets, as well as the outputs, consumption and international trade levels, are all determined endogenously. The general equilibrium is parameterized by the volume of resources traded.

An increase in resource exports may be either beneficial or harmful, depending on the characteristics of the trading economies. When the South's economy is dual, the North's homogeneous, and the rates of profit are high, increases in resource exports are associated with lower real wages, employment and consumption in the South; the South's terms of trade and its export revenues decrease. This is traced to changes in the domestic terms of trade between the traditional and the industrial sectors. However, the profits in the South increase, thus explaining in part the expansion of exports under these circumstances.

More favorable outcomes are obtained by increasing resource exports when the exporting economy is more homogeneous. Sufficient conditions are given for an export policy that increases the welfare of the exporting country, improves its international terms of trade and increases its export revenues.

The characteristics which determine whether an expansion of resource exports is beneficial or harmful to the economy are the structure of the economy and the endogenous factor prices. Since the equilibria and the associated values of endogenous variables are determined for a given level of resource exports, it follows that whether it is better to increase or decrease the volume of resources exported will depend on the equilibrium level of exports. It is therefore possible to determine the optimal level of exports for an economy of a given structure.

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