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The economic effects of a natural resource discovery: A theoretical and simulation exercise

Journal Article


Abstract


  • The economic effect of a natural resource discovery is an important and contentious issue, and clearly of particular relevance to economies such as Australia and the UK with booming mineral sectors. Such a discovery may have adverse or beneficial effects on other sectors of the economy such as manufacturing, and on the economy as a whole, which would require an appropriate macroeconomic policy response by the government. The paper explores such issues. The conceptual framework adopted is that developed by Dornbusch (1976), which specifically analysed the macroeconomic effects of changes in the money supply. In this model financial markets are efficient and forward looking, but nonfinancial markets are inefficient and backward looking. The extensions to this framework, to capture the economic effects of natural resource production, are identified, as well as the conflicting economic and policy conclusions derivable from alternative amendments and assumptions of the model. Dutch disease effects can be observed from this conceptual framework, a phenomenon which has been observed in energy abundant economies such as Australia, Holland, and the UK. A simulation of the conceptual framework identifies both in more detail and quantitatively, the possible adjustment processes following a natural resource discovery. The major conclusions to be derived from this paper are that except in unrealistic circumstances; specifically where there is no lag in the demand for nonenergy output arising from revenue generated in the energy sector, and energy production does not directly affect the demand for money, or where domestic prices are perfectly flexible, there will be a period of time during the adjustment process where non‐oil output would decline below its full employment level. Hence the general situation is one where energy production will require an appropriate macroeconomic policy response by the government, if minimising its adverse effects on other sectors of the economy and of maintaining non‐oil output at, or close to, its full employment level is an important priority. Copyright © 1989 John Wiley & Sons, Ltd.

Publication Date


  • 1989

Citation


  • Harvie, C. (1989). The economic effects of a natural resource discovery: A theoretical and simulation exercise. International Journal of Energy Research, 13(6), 701-716. doi:10.1002/er.4440130609

Scopus Eid


  • 2-s2.0-0024855935

Web Of Science Accession Number


Start Page


  • 701

End Page


  • 716

Volume


  • 13

Issue


  • 6

Abstract


  • The economic effect of a natural resource discovery is an important and contentious issue, and clearly of particular relevance to economies such as Australia and the UK with booming mineral sectors. Such a discovery may have adverse or beneficial effects on other sectors of the economy such as manufacturing, and on the economy as a whole, which would require an appropriate macroeconomic policy response by the government. The paper explores such issues. The conceptual framework adopted is that developed by Dornbusch (1976), which specifically analysed the macroeconomic effects of changes in the money supply. In this model financial markets are efficient and forward looking, but nonfinancial markets are inefficient and backward looking. The extensions to this framework, to capture the economic effects of natural resource production, are identified, as well as the conflicting economic and policy conclusions derivable from alternative amendments and assumptions of the model. Dutch disease effects can be observed from this conceptual framework, a phenomenon which has been observed in energy abundant economies such as Australia, Holland, and the UK. A simulation of the conceptual framework identifies both in more detail and quantitatively, the possible adjustment processes following a natural resource discovery. The major conclusions to be derived from this paper are that except in unrealistic circumstances; specifically where there is no lag in the demand for nonenergy output arising from revenue generated in the energy sector, and energy production does not directly affect the demand for money, or where domestic prices are perfectly flexible, there will be a period of time during the adjustment process where non‐oil output would decline below its full employment level. Hence the general situation is one where energy production will require an appropriate macroeconomic policy response by the government, if minimising its adverse effects on other sectors of the economy and of maintaining non‐oil output at, or close to, its full employment level is an important priority. Copyright © 1989 John Wiley & Sons, Ltd.

Publication Date


  • 1989

Citation


  • Harvie, C. (1989). The economic effects of a natural resource discovery: A theoretical and simulation exercise. International Journal of Energy Research, 13(6), 701-716. doi:10.1002/er.4440130609

Scopus Eid


  • 2-s2.0-0024855935

Web Of Science Accession Number


Start Page


  • 701

End Page


  • 716

Volume


  • 13

Issue


  • 6