Question

The curse of natural resources (oil) - observation that countries rich in natural resources (oil) tend to perform badly in terms of growth - shown empirically and analyzed in a number of studies. Using a theoritical linkage such as the Dutch disease effect,explain how oil may become a curse to ghana
b) Why does oil seem to matter for the marcroeconomy
c) How oil shocks may affect the macroeconomy
d) where do oil prices shocks come from

Answer 1

The countries that have rich natural resources may perform poorly in terms of the economic indicators. This is a paradox. This paradox is explained by Dutch disease effect.

a) Here, Ghana is rich in oil reserves. This will attract lots of foreign investment in Ghana. This will raise the value of currency of Ghana and when currency appreciate the exports will decrease and imports increases.

This will negatively affect the manufacturing industries as the cost of production increases. Ultimately it will lead to unemployment as the entrepreneurs will try to reduce the cost.

b) Oil is important for the economy as it is a widely used component in many industries and in the production process. It is a main input or raw material which is essential in producing many goods. We use oil for various reasons in our day to day life.

c) Oil price is important from the macroeconomic perspective because it directly and indirectly affects various macroeconomic indicators.

Oil prices has a great impact on the level of inflation in the economy. When the oil prices increases the price of goods sold in the economy increases. This is because the price of oil enters the cost of production of goods. When the price of the goods increases it give rise to inflation.

High oil prices will also lead to a reduced supply of goods.

So, these are the various ways in which oil prices shock may effect the macroeconomy

d) Oil price shock largely emerge from the expectations about the demand and supply shocks in the coming years. Expectations about the future plays a key role in oil price shock.