A Macroeconomic Model of a Developing Country Endowed with a Natural Resource

The present paper presents a short-run theoretical macroeconomic model of the type suggested in Sachs (1996), attempting to differentiate economic development in East Asia with Latin America. Latin America, when compared to East Asia is said to exhibit a pattern of growth associated with relative natural-resource abundance. The economy in the model that follows is comprised of 3 sectors, two of which involve traded goods and one non-traded commodity. A monetary sector is also incorporated. The first traded good is the natural resource based sector whose output is entirely exogenous and purely for export. The other traded commodity is a manufactured good, consumed at home and exported abroad. In the Latin American case devaluation might be contractionary, and a resource boom could lead to the rise of the non-traded sector at the expense of the traded good. The effect of an expansion in the money supply induced by capital inflows is to expand the economy. When the model is tuned to the East Asian case, resource booms might even expand the traded sector, and devaluation may be expansionary. This suggests two major policy implications. First, a policy-induced devaluation, or policies to prevent exchange rate appreciation should accompany a resource boom. Secondly, policies of taxing non-traded goods aimed at fostering traded goods production may also be considered under some circumstances.