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Resource Discoveries, Learning and National Income Accounting

  • Kirk Hamilton
  • Giles Atkinson
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    Questions about the ultimate size of mineral and energy resource endowments and the degree of fiscal prudence which should be exercised by countries engaged in resource extraction have become central for many developing countries during the recent resource boom. To explore this question, a model of optimal resource extraction and discovery combines two polar assumptions: (i) that discovering a resource today drives up the cost of future resource discoveries, and (ii) that extracting resources yields knowledge which reduces the cost of discovery. While the model shows that resource discoveries should be valued at marginal discovery cost in measures of national saving and income, the ultimate size of the resource which can be exploited is the result of the interplay between rising discovery costs and accumulating knowledge. Empirical tests of this model show that the resulting income estimates would be extremely volatile for many extractive economies, owing to the lumpiness of resource discoveries. Two alternative accounting approaches, based on Hicksian concepts, yield more intuitive and less volatile income estimates. The question of fiscal prudence for extractive economies hinges upon how optimistic countries are about the risks in future mineral and energy markets, and how far into the future these countries are willing to project optimistic trends when making decisions about how much to consume and how much to save out of current resource revenues.

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    File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/WP117-resource-discoveries-learning-national-income-accounting.pdf
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    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 117.

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    Date of creation: Jul 2013
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    Handle: RePEc:lsg:lsgwps:wp117
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    8. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
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    14. Asheim, G.B., 1998. "Green National Accounting: Why and How?," Memorandum 08/1998, Oslo University, Department of Economics.
    15. Kirk Hamilton & Giovanni Ruta & Liaila Tajibaeva, 2006. "Capital Accumulation and Resource Depletion: A Hartwick Rule Counterfactual," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(4), pages 517-533, August.
    16. John Livernois, 2009. "On the Empirical Significance of the Hotelling Rule," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 22-41, Winter.
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    21. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 841-61, October.
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