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Effects of World Price and Oil Export Price Increases in the Framework of One-sector and Two-Sector Stylized Models

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  • Kapsalyamova, Zhanna

Abstract

Interesting stylized models that discuss the implications of the oil boom or oil export price increase on an oil-rich economy must involve a tension between effects that tend to boost oil sector and harm non-oil sector and effects that vice versa tend to boost non-oil sector and harm oil sector. This paper explores such models and examines at large the implications of the oil export price increase through the prism of interaction between these two effects. This paper applies the 1-2-3-model of Devarajan et al. (1990) and develops two stylized models that examine the effects of the world price increase and oil export price increase on the economy respectively. A central feature of the developed stylized models is that they can distinguish between the two effects generated by the oil export price increase, namely the balance-of-trade effect and the import-competing effect. The balance-of-trade effect shows the response of the economy to the oil export price increase, depending on whether the economy runs a trade surplus or a trade deficit in the benchmark equilibrium, with the import-competing effect set equal to one. It shows conditions that cause changes in the producers’ real costs and hence determines which sector grows and which sector shrinks in the wake of the oil export price increase. The import-competing effect, under the assumption that trade is balanced, shows the effect of the variation in the Armington elasticity of substitution between oil goods in the second model and non-oil goods in the third model. It shows how competition between imported and import-competing goods affects producers’ real costs and hence determines which sector grows and which sector shrinks in the wake of the oil export price increase.

Suggested Citation

  • Kapsalyamova, Zhanna, 2009. "Effects of World Price and Oil Export Price Increases in the Framework of One-sector and Two-Sector Stylized Models," MPRA Paper 18800, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:18800
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    File URL: https://mpra.ub.uni-muenchen.de/18800/1/MPRA_paper_18800.pdf
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    References listed on IDEAS

    as
    1. Benjamin, Nancy C. & Devarajan, Shantayanan & Weiner, Robert J., 1989. "The Dutch disease in a developing country : Oil reserves in Cameroon," Journal of Development Economics, Elsevier, vol. 30(1), pages 71-92, January.
    2. Devaragan, Shantayanan & Lewis, Jeffrey D. & Robinson, Sherman, 1990. "Policy lessons from trade-focused, two-sector models," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 625-657.
    3. 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.
    4. J. Peter Neary & Sweder van Wijnbergen, 1985. "Natural resources and the macroeconomy : a theoretical framework," Working Papers 198536, School of Economics, University College Dublin.
    5. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-380, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    oil export price increase; Armington elasticity of substitution; balance-of-trade effect; import-competing effect;

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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