Raw materials price and technological uncertainty in a small open economy

This paper examines the implications of raw materials price uncertainty for capital allocation and compares the impact of production uncertainty and raw materials price uncertainty. It shows that the economy may avoid risk by allocating more capital in a sector using an input (for example, raw materials) which has a random price. This contrasts with multiplicative production uncertainty case, in which the economy avoids risk by allocating less capital to the risky (uncertainty) sector. Input efficiency uncertainty and materials input price uncertainty have the same implications for a raw-materials-importing economy, but quite opposite implications for a raw-materials-exporting economy.