Which of the following is a characteristic of the economic model used to explain the Dutch disease?

• A. It focuses exclusively on the effects of government intervention in monopolistic markets.
• B. It assumes that all markets are perfectly competitive and there are no externalities.
• C. It analyzes the impact of a resource boom on the allocation of labor and capital between tradable and non-tradable sectors.
• D. It models only the long-run equilibrium without considering short-run adjustments.

Answer: (C)

Verified step by step guidance

1. Understand the context of the Dutch disease: it is an economic phenomenon where a resource boom (like discovering natural resources) affects the economy's structure, particularly the allocation of labor and capital.
2. Recognize that the economic model explaining Dutch disease typically divides the economy into tradable sectors (like manufacturing or exports) and non-tradable sectors (like services or construction).
3. Note that the model focuses on how a resource boom shifts resources (labor and capital) from tradable sectors to non-tradable sectors, causing changes in relative prices and potentially harming the tradable sector.
4. Identify that the model usually assumes perfectly competitive markets without externalities to isolate the effects of the resource boom on resource allocation, rather than focusing on government intervention or monopolistic markets.
5. Understand that the model often considers both short-run and long-run adjustments to capture the dynamic effects of the resource boom, rather than only modeling long-run equilibrium.