Economics (AS & A Level) · Oct / Nov 2024 · Paper 41 · Question 1

The economic impact of extracting natural resources Many low-income countries have high unemployment and large deposits of unused natural resources. In 2007, Ghana discovered a new offshore oil field and extraction started in 2010. The discovery and extraction of such natural resources can create new jobs, that increase incomes and consequently gross national income (GNI). The additional income will lead to an increase in spending on both domestic and imported goods and services, creating further employment in other sectors through the multiplier effect. However, the extraction of oil may ‘crowd out’ other sectors of the economy. Workers might move, for example from agriculture and manufacturing to the mining sector due to higher wages. Also, the prices of houses, land and locally produced goods may increase. This could increase the cost of living and discourage businesses from operating in the affected region. The export of oil from Ghana causes an inflow of United States dollars (US$), increasing the exchange rate of Ghana’s currency, the cedi. This appreciation reduces the competitiveness of Ghana’s agricultural and manufactured goods, leading to an increased demand for imports. This loss of competitiveness is referred to as the ‘Dutch disease’, reflecting the experience of the Netherlands following the exploitation of their natural gas reserves. Oil provides the Ghanaian government with revenue from the tax on each barrel of oil produced. This revenue can be used to provide transfer payments and goods and services such as roads, health facilities, and public water supply. These can benefit both households and businesses. Alternatively, the presence of such revenues can create corruption and conflict as political groups compete for them. Between 2011 and 2018 agricultural products and food as a share of Ghana’s exports have decreased, as shown in Fig. 1.1. 0 20 40 60 80 100 2009 2008 2007 2010 2011 2012 2013 2016 2017 2018 % Source: World Bank database, 2019 manufactures exports fuel exports ores and metal exports agricultural raw materials and food exports Fig. 1.1: Structure of exports of goods from Ghana 2007 to 2018 3 The extraction of natural resources has also affected Ghana’s economic performance, as shown in Table 1.1. Table 1.1: Selected economic data for Ghana, 2007 and 2019 2007 2019 Human Development Index (HDI) 0.55 0.61 GNI per capita (US$) ppp 2478 5484 exchange rate (cedi per US$) 1.06 0.17

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