Good evening everyone,
I have a simple DSGE model in the closed form. However, my economy can still (and only) imports oil from the RoW. When I find by hand the resource constraint of my economy by using the household budget constraint, the government budget constraint and the maximizing profit of the firm, I get the following equation:
GDP = C (total consumption except oil) + Oil (consumption of oil by the economy) + I + G
Oil does not appear as an import as the sign is positive, which is troubling. In my case, households and firms consume that oil.
The issue is the following. If I run my model, Oil consumption diminishes through time, which diminishes GDP… while it should on the contrary increase GDP as my economy is an oil-importing economy. So a decrease of oil consumption should increase GDP. How should I model oil such as it appears with a negative sign in the resource constraint of the economy ?