Plain Sense Economics

A recent news article announced the discovery of significant mineral deposits in Afghanistan.

The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe. (Source: New York Times, June 13, 2010)

This is a good opportunity to review the core economic concepts of scarce resources and production possibilities. Classical economics starts with the idea that resources which can make us happy, or make our nations thrive are scarce – there are not enough resources to satisfy all of our needs. Going from here, classical economics studies how people and nations make decisions on the allocation/use of those scarce resources.

Afghanistan is a desperately poor nation – with a GDP of $800 per capita; compared to $46,400 for the U.S. (Source: CIA World Factbook). Much of this is due to decades of war and conflict within its borders. It must allocate a small number of scarce resources to a variety of outputs. Just two of these many outputs might be food production (necessary for health and a standard of living) and textiles (necessary as an export good).

Before and After the Discovery of Mineral Deposits

We use a production possibility curve to illustrate the decisions on how to allocate scarce resources between two outputs. Consider this sample graph.

We choose two outputs – food and textiles – and place one on each axis. The points where the curve touches an axis represent the theoretical output if all scarce resources were devoted to that single output. More realistically, the curve represents various combinations of outputs, based on allocating those scarce resources between the two outputs. If the country operates on its production possibility curve, it is using all of its resources efficiently. If it operates below the curve, some scarce resources are not being used.

Now, all of a sudden, Afghanistan discovers that it has these vast reserves of precious minerals. The possibilities in their economy will improve. The production possibility curve will shift out and to the right. The challenge for this country hobbled by poor transportation networks, corruption in government, and active hostilities within its borders is to reach this new production possibility.