International trade in resources: a general equilibrium analysis

Physical considerations alone cannot explain the volatile behavior of resource prices, or the effects these have on different regions of the world. An optimization analysis may not suffice either, since typically there are several distinct objectives: conservation, cost-minimization, and the maximization of revenues by resource exporters. These issues require an economy analysis of markets. Markets for resources interact rather strongly with other markets: for goods such as food or industrial products and for inputs to production such as labor and capital. Such interactions are best studied with general equilibrium tools. These tools explain trade and the determination of prices across different markets. In a general equilibrium model, different economic agents have typically different objectives, a useful feature for the study of resource markets. Trade in resources takes place largely across different regions, so one is dealing with international trade. A system of simultaneous nonlinear equation can easily become unmanageable, and require computer analysis. Computer solutions cannot, however, disclose laws of economic behavior, nor can they explain why and how certain policies work. The challenge is therefore to represent the economy by a set of equations which is sufficiently simple to admit analytic or simple implicit solutions and the study of their qualitative behavior, while at the same time retaining the complexity needed to explore the issues involved. This paper will show how to perform this task and apply the results to study policy in the area of natural resources.