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 rate policy or subsidies to traditional exports could improve the outcom