Question

The discovery of a large natural gas reserve in the Persian Gulf in late 1990s attracted foreign investments for the develpoment of this field on the southern coast of Iran. As a result, many high paying jobs were created for engineers. At the same time, the manufacturing industries in Iran experienced a downtown. Using a medium-run model with two gooods( Gas and Manufacturing), explain why the manufacturing sector contracted soon after the discovery of the gas reserve. Use the apporpriate diagrams and label all the axes and curves.

Answer 1

The discovery of a large natural gas reserve in the Persian Gulf in late 1990s attracted foreign investments for development of this field in Iran. This led to a downturn in the manufacturing sector as the advantages of investment in the petroleum industry was far more than producing manufactured goods. This is because of the opportunity cost involved. A country benefits by producing more of a product that is either easily available to it or something it specializes in.

Medium run model with two goods:-

The above graph indicates the amount of goods that could be produced in relation to the amount of oil that could be sold. The numbers indicate that producing more of oil and less of manufactured goods leads to comparitive advantage. This will lead to gains from trade as the world dependency on oil during the 1990's was soaring.