T h s paper presents a theoretical analysis of the "Dutch Disease": the phenomenon whereby a boom in one traded goods sector squeezes profitability in other traded goods sectors, both by directly bidding resources away from them and by placing upward pressure on the exchange r a t e . The effects of such a boom on. resource allocation and income distribution are studied in a variant of the "Australian" model of a small open economy, under different assumptions about the degree of intersectoral factor mobility.

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This paper considers some policy choices posed by the prospective Australian resources boom, distinguishing betneen the investment boom and the export boom and betneen the adjustment and the nonadjustment options. With adjustment both booms are likely to lead to real appreciation, raising the 'Dutch disease' issues. Non-adjustment means accumulating foreign exchange reserves by preventing both nominal appreciation and injlation. It is discussed nhether protection by tar@ or quotas should be lowered or raised because of the export boom. An Appendix analyzes the monetary policy implications of both the jloating rate (adjustment) and the fired rate (non-

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