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The Impact of Windfalls: Firm selection, trade and welfare

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  • Gry Oystenstad
  • Wessel Vermeulen

Abstract

We ask how a small open economy with heterogeneous rms responds to a resource windfall. A resource windfall boosts demand but also a ects wages such that production costs increase. The result is a higher number of firms and renewed selection among firms: New firms at the lower end of the productivity continuum can produce for the domestic market, while only the most productive firms continue to export. While the share of firms that sell traded varieties decreases, the average productivity of exporting firms increases. The increase in the number of varieties caused by a larger number of firms and the inflow of additional imports implies that there is an increase in aggregate welfare over and above the direct windfall gain. We provide analysis in a model with two types of labor. The windfall causes a reallocation of labor types and a change in relative wages, thereby implying different welfare outcomes for each type of labor and the possibility of rising inequality.

Suggested Citation

  • Gry Oystenstad & Wessel Vermeulen, 2015. "The Impact of Windfalls: Firm selection, trade and welfare," OxCarre Working Papers 162, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:162
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    File URL: http://www.oxcarre.ox.ac.uk/images/stories/papers/ResearchPapers/oxcarrerp2015162.pdf
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    References listed on IDEAS

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    5. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-848, December.
    6. Cherif, Reda, 2013. "The Dutch disease and the technological gap," Journal of Development Economics, Elsevier, vol. 101(C), pages 248-255.
    7. Torfinn Harding & Anthony J Venables, 2016. "The Implications of Natural Resource Exports for Nonresource Trade," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(2), pages 268-302, June.
    8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    9. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
    10. Hunt Allcott & Daniel Keniston, 2014. "Dutch Disease or Agglomeration? The Local Economic Effects of Natural Resource Booms in Modern America," NBER Working Papers 20508, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Resource windfalls; heterogeneous firms; trade; welfare;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade

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