On a Two-Sector Model of Economic Growth with Exhaustible Natural Resources

Abstract

Recent contributions to the theory of economic growth with exhaustible natural resources are concerned mainly with deriving the optimal rate of depletion of a resource stock and with the problem of how to attain an equitable balance between present and future generations. Other theories are interested in whether a competitive market achieves efficient depletion of the exhaustible resources. These conclude that, to ensure efficiency of a competitive economy under conditions of perfect capital markets, it is required that individuals have perfect foresight, or there exist futures markets extending into an infinite future. The basic framework of these works is the one-sector model. The purpose of this paper is to extend the analysis to a two-sector model and to examine the effects of the depletion of exhaustible resources on the relative prices and the relative growth of each sector. An economy is considered in which consumption and investment goods are produced by separate production functions and using exhaustible natural resources in different intensities. The dynamic behavior of relative prices and the growth pattern of the economy are analyzed under assumptions of a constant-savings ratio, perfect capital markets, and perfect foresight. It is shown that the growth rates of the two sectorsmore » and the dynamic paths of the relative prices depend crucially on the initial stocks of capital and exhaustible resources, as well as the relative factor intensities of the two sectors. 11 references.« less