The Dutch Disease or Problems of a Sectoral Boom

A resource boom in a small open industrialized country is analyzed in a simple Keynesian framework, allowing for domestic use of the resource as intermediate input. It is shown that an output boom (increased resource production) is outright beneficial: demand expands through the familiar multiplier process, stimulating production and employment in all sectors. A price boom, however, has negative cost-push effects affecting relative prices. The outcome depends crucially upon sectoral resource intensities and the size of initial resource exports. Conditions are analyzed, under which exchange rat... Mehr ...