Resource Depletion and Sustainability in Small Open Economies

Exogenous price changes affect the amount that a small country exporting natural resource commodities must invest to sustain its consumption level. The necessary amount is given by the difference between Hotelling rent and the discounted sum of future terms-of-trade effects (capital gains). The latter term is found to be large relative to the former in the case of petroleum depletion in Indonesia. This suggests that resource-rich countries will need to invest more than previously expected to sustain their consumption levels, if natural resource prices continue their long-term historical decline.