Ex ante plant design, portfolio theory, and uncertain terms of trade

The issue of productive flexibility of an economy facing uncertainty in the international market is modeled as a portfolio problem of ex ante plant design. It is shown that as a country becomes more risk averse, other things being equal, its optimal ex post productive frontier becomes less flexible. The optimal frontier becomes less flexible also if the probability of market foreclosure increases, but it may become more flexible if the probability distribution of the random terms of trade becomes more spread out. A change in risk aversion or uncertainty may lead to a reversal in the pattern of trade.