Wednesday, March 27, 2013

"Dutch Disease" in 30 seconds

There is always demand for fossil fuels, and there is usually significant demand for all natural resources  Countries can make a fortune by extracting and then selling these products on international markets. If the supply of the national currency does not keep up with demand of these products, then the value of the currency will increase. As the buying power of the currency increases, it becomes cheaper to import other goods but it also makes it more expensive to export at the same time. Because of these currency changes, the raw materials industry will grow further at the expense of other export sectors like manufacturing. This effect then builds on itself until you have a one-dimensional natural resource economy with a strong currency. Though the economy might be wealthier overall, it also becomes less stable as it loses its diversity. 

Though the theory is sound, it is a lot harder to tell whether or not (and to what extent) an economy is suffering from "Dutch Disease". There is a fear that the Canada is suffering from it and therefore is becoming a one-dimensional economy based off of natural resource extraction, mainly the Alberta Oil Sands. There is also a fear, though significantly less so due to the sheer size of the US economy, that the US might become one as well because of the Shale Oil/Gas boom. 

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