International Trade with a Renewable Resource as an Intermediate Good: The Steady State Analysis in a Small Open Economy

Abstract

Two final goods, one primary factor and one resource model was developed to examine the effects of free trade on a small open economy when open-access resources are used as an intermediate to produce the final goods. We suppose only the final goods to be tradable and restrict our attention to the steady state of this economy. Then we investigated the production patterns and economic welfare. The mechanism behind this model follows the Rybczynski theorem in the standard Heckscher-Ohlin model, but responses to the resource harvest and outputs to a change in the relative price are ambiguous. The production patterns and welfare gains depend on the equilibrium resource stock before trade. Under some circumstances, a small open country may suffer from trade, while free trade may also mitigate the overuse of the resource stock.JEL Classification: F11, F18, Q22, Q27, Q28