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Question

Difficulty: MediumMining and Petroleum Sector: Roles, Impact, and Management

A sustained boom in Nigeria's crude oil revenue leads to massive foreign exchange inflows, causing the domestic currency to appreciate and rendering traditional export sectors like agriculture internationally uncompetitive. Which economic concept describes this structural distortion?

  1. A
    Import substitution
  2. Dutch diseaseAnswer
  3. C
    Economic growth
  4. D
    Resource allocation

Answer

Dutch disease
The correct answer is Dutch disease. When a country experiences a natural resource export boom (such as crude oil in Nigeria), the heavy influx of foreign currency causes the domestic currency to appreciate. This real exchange rate appreciation makes non-oil exports, such as agriculture and manufacturing, less competitive in global markets, leading to structural decline in those sectors.

Step-by-Step Solution

1
Identify the economic trigger and mechanism in the scenario
Crude oil exports generate large inflows of foreign currency, causing domestic currency appreciation.
Increased demand for domestic currency or massive foreign exchange revenue strengthens the exchange rate.
2
Analyze the impact on non-oil export sectors
Agricultural goods become relatively more expensive abroad and less competitive, shrinking non-oil export earnings.
A stronger local currency makes domestic products costlier for foreign buyers.
3
Match the observed macroeconomic condition with the correct economic term
The phenomenon where a primary resource boom harms other tradeable sectors via currency appreciation is known as Dutch disease.
Dutch disease specifically describes this resource curse channel.

Key Concept

Dutch Disease in Nigeria's Petroleum Sector
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Topics

Mining and Petroleum Sector: Roles, Impact, and Management

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