The effects of energy and commodity prices on commodity output in a three-factor, two-good general equilibrium trade model

TL;DR

This paper investigates how energy and commodity prices influence commodity output within a three-factor, two-good general equilibrium trade model, deriving new conditions for relationship signs and analyzing the role of factor complementarities.

Contribution

It introduces a novel sufficient condition for the sign patterns of relationships between prices and output, utilizing the EWS-ratio vector and Hadamard product in a three-factor trade model.

Findings

Strengthening import restrictions can increase exportables' output if factors are complements.

The position of the EWS-ratio vector determines the sign of relationships.

The study provides new theoretical conditions not previously derived.

Abstract

We analyze the effects of energy and commodity prices on commodity output using a three-factor, two-good general equilibrium trade model with three factors: capital, labor, and imported energy. We derive a sufficient condition for each sign pattern of each relationship to hold, which no other studies have derived. We assume factor-intensity ranking is constant and use the EWS (economy-wide substitution)-ratio vector and the Hadamard product in the analysis. The results reveal that the position of the EWS-ratio vector determines the relationships. Specifically, the strengthening (resp. reduction) of import restrictions can increase (resp. decrease) the commodity output of exportables, if capital and labor, domestic factors, are economy-wide complements. This seems paradoxical.