The Dutch disease paradox: endowment change and heterogeneous firms

This paper presents a model of international trade with heterogeneous firms and endowment differences across countries to explore the adjustment of production and trade patterns to exogenous shocks, such as massive endowment changes. I show that a windfall of resources which can be used for production has a controversial effect on the economy. On the one hand, it leads to a lower productivity level in the economy, which is a known characteristic of the Dutch disease. On the other hand, it increases the relative domestic productivity of the sectors using that resource more intensively, compared to the same industries in other countries, and also raises the exporters share in that sector. Thus, it enhances the Ricardian comparative advantage along the lines of the Heckscher–Ohlin comparative advantage.