International specialisation — practice question

Botswana is the largest diamond producer in the world. In fact, in 2015 diamonds made up one third of the country’s Gross Domestic Product (GDP) of US$18 billion and 80% of its exports. At present, most of the nation’s earnings come from mining and selling rough (uncut) diamonds. For a 1.5 carat rough diamond, it receives only US$700. After that, the diamond is cut, polished and finished, usually in other countries. India leads the world market for cutting and polishing diamonds. The cost of cutting and polishing diamonds in India is only a quarter of the cost in Botswana. The worldwide average cost of finishing a 1.5 carat diamond is US$8000. The diamond is then sold to the customer with a 25% profit margin. Botswana is attempting to build up industries linked to diamond mining, including cutting, polishing and jewellery making such as diamond rings. Fig. 1 illustrates the way the global market for diamond rings changed in 2015. Fig. 1 The global market for diamond rings in 2015. The vertical axis is labelled "price of diamond rings" and the horizontal axis is labelled "quantity of diamond rings". The origin is labelled O. Two equilibrium prices are labelled $P_1$ and $P_2$. Two equilibrium quantities are labelled $Q_1$ and $Q_2$. There is an upward sloping supply curve labelled S. There are two downward sloping demand curves labelled $D_1$ and $D_2$. The Botswanan Government has also persuaded the world’s largest diamond company to establish itself in Gaborone, the capital of Botswana. However, some government ministers worry that Botswana relies too heavily on diamonds. They point out that the supply of diamonds is finite and call on the government to promote diversification. In addition to diamonds, the country has several other strengths. It benefits from good infrastructure, a developed education system and free hospital treatment.