Natural Resource Abundance and Economic Growth in a Two Country World

We investigate the dynamics of nonrenewable resource abundance on economic growth and welfare in a two-country world. One country is endowed with a nonrenewable-resource, otherwise, countries are identical, except possibly for their initial endowments of capital. Unlike previous studies analyzing small open economies, we show that once interactions between resource-rich and resource-less economies are considered the effect of the nonrenewable resource on the resource rich economy's performance can be positive. We derive the necessary condition for the nonrenewable resource to have a positive (negative) effect on the growth rate of the resource-rich economy. The endowment of the nonrenewable resource has a positive effect on the growth rate of the resource-rich country provided the elasticity of the initial price of the resource with regard to the initial stock of the resource is greater than minus one. An analytical solution to the model confirms that this elasticity is greater than minus one, and numerical simulations with a very large range of parameter values confirm the same.