Year: 1976
Type: article
Abstract: The 'Oil Crisis• provides the challeqe to anal)'7.e effects of a resource shortage in a minimal monetary model of a vertically tradmg world economy.The one-asset monetary approach to balance of payments theory is employed ~o demonstrate that in a model with one final good and two inputs the elasticity of substitution between the domestic factor of production and an imported raw material plays the key role in detenninins the reaction of the balance of payments ( =balance of trade). l. lntroducdoaIn this paper the economic implications ofa rise in price of a natur2I resource produced by one group of countries and used as an indispens:ble factor of production in another groap of countries is investigated utilizing a minimal theoretical structure.In particular, we assume the world consists of two trading partners who are engaged in a vertical trade 1,attem with world production of final goods performed in a tw(,..tier produ(.1ionprocess.The group of 'fr,!'Cign countries' is the sole produci~, of the n.atural resource which is sold as a raw material to the group of 'dtlmest:,.; coumtries.'However, in what follows we do not intend to consider individual countl'lies in each group.Therefore we introduce the simplifying notions of 'foreign country' and 'domestic country' respectively.By adding domestic labor resources the home country operates as a processing plant and manufactures a final good which is both domestically consumed and exchanged with the foreign country in payment for the imported raw material.In this simpJe structure each country specializes in the production of their exportables.1 The postulated rist) in resource price is caused by an exogenous reduction in the production of tbe natural resource.Within the framework ofa simple monetary model oftrade in final and intermediate goods, the effects of this real disturbance are explo:red.Emphasis is placed on the level•1 gratefully acknowledge encouragement and bdp from Rudiger Dornbusch.I benefited also from Horst Herberg's comments on a first draft, and I followed in some points the recom-mendatio11s of an anonymous referee.Tlllis work was made possible by a scholarship from Deutsche Forschungsgemeinschaft.1 See Khang (1969) for a discussion of r,rowth in a lbarter model of the described structure.
Author: Michael Schmid
Institutions: University of Mannheim, University of Chicago
Language: English
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $4,300
Funder: Deutsche Forschungsgemeinschaft
OpenAlex ID: W1969763096