What policy is most effective in reducing vulnerability to commodity price shocks?

• A. Economic resilience
• B. Economic diversification
• C. Fiscal austerity
• D. Trade protectionism

Answer: (B)

Reducing vulnerability to commodity price shocks is achieved by spreading economic activity across multiple sectors so the economy isn’t so tied to the fortunes of one export. When revenue, jobs, and growth rely on a single commodity, a drop in its price can quickly shrink government income, disrupt balance of payments, and raise unemployment. By diversifying into manufacturing, services, agriculture, or other export areas, a country creates alternative revenue streams and employment opportunities, which helps stabilize fiscal balances and overall growth when commodity prices swing. Diversification therefore lowers the exposure to price volatility and cushions the economy from sharp downturns, making it the most effective policy in this context.

Economic resilience is valuable, but it’s a broader capacity to absorb shocks, not a direct way to reduce exposure to price swings. Fiscal austerity narrows spending to balance the books but doesn’t address reliance on a single commodity, and may worsen downturns. Trade protectionism can shield some domestic industries but tends to reduce efficiency and long-run growth without solving the core risk of price volatility in export markets.