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International Trade and Net Investment: Theory and Evidence

The theory of welfare accounting shows that comprehensive measures of net investment can be used to test whether an economy is following unsustainable paths of consumption. However, the notion of net investment used in most applied studies rules out technological progress and terms-of-trade gains from international trade. This paper considers an augmented expression of net investment derived from a dynamic growth model featuring international trade in different types of resource inputs, exogenous productivity growth in final sectors, and cost-reducing progress in resource extraction. Calculating augmented net investment for the world's top twenty oil producers, we show that the difference with standard non-augmented measures can be large and may even revert some established con- clusions regarding sustainability: prospects are more favorable than previously thought in oil-exporting countries endowed with large reserves like Angola, Azerbaijan, Kuwait, Saudi Arabia and Venezuela. In oil-importing economies, future consumption possibilities are limited by the lack of expected rental incomes from future resource exports.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 11/144.

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Length: 30 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:eth:wpswif:11-144
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