Trade Theories in Scarce Resources

Running head: TRADE THEORIES IN SCARCE RESOURCES
Trade Theories in Scarce Resources
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1TRADE THEORIES IN SCARCE RESOURCES
Natural resources have always played a very crucial role in international trade. Based on
their geographical distribution, which is uneven among the different countries in the world, the
resource endowments in different countries are different. According to the traditional trade
theories or the Ricardian model, countries will specialize and export those goods and services,
which they have, in abundance as they enjoy a comparative advantage in those goods and
services. Therefore, differences in factor endowments prompt trade decisions. This was the
allocation of resources is far more efficient which result in the country to reap out high ‘gains
from trade’ as there is an increase in the social welfare.
David Ricardo in his theory of comparative advantage in the 19th century believed that the
world output would increase if countries use the theory of comparative advantage while making
trade decisions. Ricardo believed that by efficiently allocating their scarce resources to make
trade decisions a country can get a comparative advantage and the combined output will be
increased in comparison to the output that would be produced if the countries produced all the
goods and tried being self-sufficient. The comparative advantage is gained, as the opportunity
cost is lower when fewer goods are produced.
According to the standard Heckscher-Ohlin model, trade decisions are governed by the
relative differences in different country’s resource endowments that is a country will export in
those goods that uses the country’s abundant resources or factors of production and imports those
goods whose production would use the country’s scarce factor of production including trade in
scarce natural resources (Sunley and Martin 2017). The immobile and scarce natural resources
act as a source of comparative advantage that assist in international trade. This is consistent with
Leamer’s theory of relative abundance whose findings suggest that a country with abundant oil
would export crude oil and an abundance of coal and minerals would lead to raw materials to be

2TRADE THEORIES IN SCARCE RESOURCES
the chief export. Similar results have been found in Trefler’s study, which is in the grounds of
trade in resource-intensive goods. There are various extensions to the Hecksher-Ohlin theory,
which further influence the comparative advantage. This suggests that natural and scarce
resources are not the ultimate condition necessary for trade.
Scarce natural resources are identified by their finite availability ad that their extraction
or consumption in the present day can make irreversible alterations to the future generations.
Hotelling, in his study on the economics of exhaustible resources, developed a framework for
predicting the extraction path behavior as well as the behavior of prices in the light of scare
resources, which have the feature of inter-temporal trade-off (Kozlenkova, Samaha, and
Palmatier 2014). The Hotelling rule suggested that a social optimum is reached when the price of
the resource after the deducting extraction costs grows at a rate, which is equal to the rate of
interest. If the price of the resource remains constant over time then there is no gain from the
extraction or from the growing of the resource. However, in the context of scarce resources, a
policy maker in a country must have in mind that, given the limited supply of scarce resources, a
change in the rate of extraction in one period will lead to reduced scope of extraction in the next
period (Farah and Cima 2013). This will have negative welfare effects on the future generations.
Further research shows that a country, which has a relatively well endowment of scarce
resources, will trade either in it or in goods that would use those scarce resources and there will
not be any over exploitation unless there are any market or political economy failures.