ECO209Y1 Chapter Notes - Chapter Case 9: United States Treasury Security, Pembina Institute, Mark Carney

234 views3 pages
Published on 22 Apr 2018
School
UTSG
Department
Economics
Course
ECO209Y1
Natural resources are a blessing, but may also entail some negative impacts
Surge in natural resource prices, foreign assistance, direct foreign
investment
Or any large inflow of foreign currency
Refers to harmful consequences of increases in a country's income, particularly due to
natural resource discovery
Made currency appreciate, Dutch non-oil exports less competitive
Increase in wealth after discovery of natural gas in North Sea
Inflow of foreign currency as result of imports depreciates currency
Value of currency increased so much that Dutch goods too expensive for foreigners,
cheaper for Dutch people to buy imported goods than domestic
1.
Price takers, price determined in international markets
Real wages, aggregate demand increase
In Netherlands, commodity sector expanded rapidly due to discovery of gas
Commodity sector
i.
Particularly manufacturing, prices are constant markup over unit labor cost
Contracts due to Dutch disease
Non-commodity sector
ii.
Tradeable sector
I.
Non-tradeable sector (only for domestic consumption, can be traded in international
market; ie housekeeping, restaurants, construction)
II.
US sent wheat
Inflow of wheat drove price of wheat down in Haiti
Another example of foreign aid is earthquake in Haiti
Workers working abroad sending money back to family (prevalent in Mexico,
Philippines)
Another cause of Dutch disease are remittances
Sector that produces with cheap labor will remain very competitive
Country must control value of exchange rate to protect firms in high-tech
sector with more skilled labor to be able to compete fairly in international
market
Other sectors that produce with skilled labor will be uncompetitive with high
exchange rate due to demand caused by unskilled labor sector
Another cause of Dutch disease: country produces great deal of manufactured goods for
export using cheap, unskilled labor
Three sectors of economy
Rapid increase in foreign capital, through discovery of natural resource, price surge of
commodity, or large inflow of foreign aid
Developing countries more prone because economies are more resource dependent
US would not suffer from Dutch disease
US produces a lot of oil, but their economy is more diversified and oil production is tiny
fraction of their economy
What conditions are usually needed for Dutch disease to arise in a country? Why are developing
countries usually more prone to experience Dutch disease?
2.
Significant increase in amount of foreign capital
If residents spend additional money on imports, no effect
Production shifts towards growing export sectors and to domestic non-trade sectors, other
sectors not privy to price surge decrease
Reallocation of resources away from non commodity tradeable sector
While rate of unemployment may not be changing, type of jobs and quality of jobs will
change for those from contracting sector
What happens to a commodity-exporting country when the prices of commodities significantly
increase? How is the country’s composition of output affected? What is the transmission
mechanism?
3.
Not necessarily
Would a country be more prone to catch Dutch disease if it had a flexible exchange rate system
rather than a fixed one?
4.
Case Study 9: Dutch Disease: The Resource Curse
March 22, 2018
ECO209 Page 1
Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Case study 9: dutch disease: the resource curse. Natural resources are a blessing, but may also entail some negative impacts. Refers to harmful consequences of increases in a country"s income, particularly due to natural resource discovery. Surge in natural resource prices, foreign assistance, direct foreign investment. Increase in wealth after discovery of natural gas in north sea. Made currency appreciate, dutch non-oil exports less competitive. Inflow of foreign currency as result of imports depreciates currency. Value of currency increased so much that dutch goods too expensive for foreigners, cheaper for dutch people to buy imported goods than domestic. In netherlands, commodity sector expanded rapidly due to discovery of gas. Particularly manufacturing, prices are constant markup over unit labor cost. Non-tradeable sector (only for domestic consumption, can be traded in international market; ie housekeeping, restaurants, construction) Another example of foreign aid is earthquake in haiti. Inflow of wheat drove price of wheat down in haiti.

Get OneClass Grade+

Unlimited access to all notes and study guides.

YearlyMost Popular
75% OFF
$9.98/m
Monthly
$39.98/m
Single doc
$39.98

or

You will be charged $119.76 upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.