Extension of krugman’s comparative advantage model: Blessed fuels and cursed metals

Abstract

Krugman’s dynamic comparative advantage model deals with spending effect from resource dividends. In its original setup dividends from resource export result in higher relative wages and therefore the Home country loses its production share to the Foreign country.
The model had minor modifications so Home country has natural resources that can be either exported or used in production of traded goods. The learning is associated only with non-resource part of traded good production, and therefore the specialization range for resource producing country is narrower consequently it can easily lose it production share to Foreign country. As alternative to raw export the country can utilize its resources in production of traded goods.
In that case, it is possible to reduce relative wages through change in demand for imported traded goods. Compared to fuel exporters, metal exporters are more vulnerable to losing their production share, and metal processing countries are much stronger in keeping their shares in the world production. From extension of Krugman’s comparative advantage model it follows that existence of large resource extractive sector would result in loss of comparative advantage more easily compared with country that have small resource sector.
Distribution of resource wealth as pure transfers results in loss of domestic industries to foreign country. In contrast, utilizing resources as inputs and producing import substituting goods, while changing domestic demand preferences for traded and non-traded goods would have positive outcomes for the comparative advantage.