Effects
In simple trade models, a country ought to specialise in industries in which it has a comparative advantage, so theoretically a country rich in natural resources would be better off specialising in the extraction of natural resources.
Other models and theories suggest that this could be detrimental. For instance, when the natural resources begin to run out or if there is a downturn in prices and competitive manufacturing industries cannot return as quickly or as easily as they left. This is because technological growth is smaller in the booming sector and the non-tradable sector than the non-booming tradable sector. Since there has been less technological growth in the economy relative to other countries, its comparative advantage in non-booming tradable goods will have shrunk, thus leading firms not to invest in the tradables sector. Also, volatility in the price of natural resources, and thus the real exchange rate, may prevent more investment from firms, since firms will not invest if they are not sure what the future economic conditions will be.
Read more about this topic: Dutch Disease
Famous quotes containing the word effects:
“One of the effects of a safe and civilised life is an immense oversensitiveness which makes all the primary emotions somewhat disgusting. Generosity is as painful as meanness, gratitude as hateful as ingratitude.”
—George Orwell (1903–1950)
“The hippie is the scion of surplus value. The dropout can only claim sanctity in a society which offers something to be dropped out of—career, ambition, conspicuous consumption. The effects of hippie sanctimony can only be felt in the context of others who plunder his lifestyle for what they find good or profitable, a process known as rip-off by the hippie, who will not see how savagely he has pillaged intricate and demanding civilizations for his own parodic lifestyle.”
—Germaine Greer (b. 1939)
“Oh that my Pow’r to Saving were confin’d:
Why am I forc’d, like Heav’n, against my mind,
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How ill my Fear they by my Mercy scan,
Beware the Fury of a Patient Man.”
—John Dryden (1631–1700)