A Model of Trade in Exhaustible Resources

Abstract

What distinguishes exhaustible resources from most other goods is not only their non-renewable nature, but also a combination of two other important characteristics related to their economic functions. In their role as an input, resources serve as an esseptial factor in the production of final goods. Moreover, because their usefulness remains intact until they are consumed in the process of production, they may also serve as a store of value. In the absence of other types of marketable assets, this latter characteristic enables the owner of the resource to achieve (through optimal resource management) his desired time profile of consumption. Corresponding to these two economic functions are two possible motives for international trade in exhaustible resources. First, in connection with their role as a productive input, trade in resources promotes efficiency in the allocation of factors of production throughout the world economy. On the basis of this motive for trade, countries with a relatively high per-capita endowment of the resource should be expected to export the, resource in exchange for final goods. Second, in connection with their asset function, trade in resources may be viewed as a means of achieving efficiency in the intertemporal allocation of consumption goods among countries. Economies with a relatively high rate of time preference desire a relatively high ratio of current-to-future consumption. Accordingly, impatient countries might be expected to import consumption goods in exchange for the resource in the present and export consumption goods in the future. The interaction between these two motives for trade is examined in the present paper within a simple two-period, two-country model. Traded objects are assumed to be an exhaustible resource and a single consumption good, although the possibility of trade in consumption loans is also considered later in the paper. The consumption good is produced in both countries with the aid of labor and the resource. Because the latter has the dual role of being a productive input as well as a store of value in the model, international trade is viewed both as a means of reallocating the world's endowment of the resource so as to ensure