International Trade and Net Investment: Theory and Evidence

30 Pages Posted: 8 Apr 2011

See all articles by Simone Valente

Simone Valente

Norwegian University of Science and Technology (NTNU)

Lucas Bretschger

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: April 5, 2011

Abstract

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 conclusions 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.

Keywords: International Trade, Natural Resources, Net Investment, Sustainability, Technological Progress

JEL Classification: E22, F11, O11

Suggested Citation

Valente, Simone and Bretschger, Lucas, International Trade and Net Investment: Theory and Evidence (April 5, 2011). Available at SSRN: https://ssrn.com/abstract=1803112 or http://dx.doi.org/10.2139/ssrn.1803112

Simone Valente (Contact Author)

Norwegian University of Science and Technology (NTNU) ( email )

Department of Economics
NTNU Dragvoll
Trondheim NO-7491
Norway

Lucas Bretschger

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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