Price - macroeconomy relationship, Macroeconomics

Assignment Help:

There are many other macroeconomic indicators which one might expect to be affected following an oil price hike. Perhaps more obviously affected than GNP is inflation. DePratto et al (2009) based their study on many different economic variables, and they analysed the effects in many different countries. Their main conclusion was that in the UK, after an oil price shock, the level of inflation increased significantly. This would be in the form of cost push inflation, and assuming that real wages did not increase in accordance with the level of inflation during this sample period, the majority of UK households would have seen a severe decline in their disposable income. Thus it can be suggested that their standard of living decreased as a result of an oil price shock. The results are perhaps not surprising because inflation is calculated by analysing the price changes of goods, period to period. Oil has a heavy weighting in comparison to other goods considered due to the importance of oil to the UK consumer. Therefore should oil prices increase by a small amount, one might expect to observe that this would result in inflation. Also when there is an oil price shock, one might expect to see rather large changes to the level of inflation in the economy.

Finally, Olson (1988) seemed to buck the trend of most economists insofar as in the vast majority of cases, the effect of oil price shocks on GNP would be negligible. His reasoning for suggesting this was that oil is only a minor component of GNP. However I believe that this will vary from country to country. Many countries have a huge reliance on exporting oil; therefore I would expect that in these countries, an oil price shock would impact positively on GNP. Furthermore, whilst oil is directly only a small component of GNP for most economies, it will affect other components of GNP which will then indirectly impact upon GNP. In conclusion, it is worth noting that Cooper (2003) has proven that in the short run, the price elasticity for oil is extremely inelastic. This infers that consumers are unable to change their consumption level of oil immediately and that only in the long term are they able to find alternative methods of decreasing their consumption.

The literature has provided a very sound level of initial understanding of the oil price-macroeconomy relationship. However there are certain findings which I believe are subject to query. From intuition, I would have expected oil price shocks to have great demand side effects in the economy. This paper, which is differentiated from the aforementioned studies as it only focuses on the UK, will explore the effects of oil price shocks not only onGDP, but also on other macroeconomic variables. This will hopefully provide greater insight into the true relationship between oil prices and economic performance in the UK. The vast majority of literature has assessed quarterly data and this paper will follow suit.


Related Discussions:- Price - macroeconomy relationship

Raising chickens requires several types of feed, Raising chickens requires ...

Raising chickens requires several types of feed, such as corn and soy meal. Consider a farm in the former Soviet Union. Try to describe how decisions on the number of chickens to b

Cobb-douglas production function, Consider an economy characterized by the ...

Consider an economy characterized by the following Cobb-Douglas production function: Y=4K 1/4 L 3/4 Where K and L represent physical capitaland labor, respectively. Assume t

Trade unions, discuss the effect that the activities of a trade union might...

discuss the effect that the activities of a trade union might have on an economy?

Describe the meaning of word -investment, Describe the meaning of word -Inv...

Describe the meaning of word -Investment When we use the word investment, we generally mean "gross investment". Essentially, gross investment comprises all finished goods which

How to evaluate total savings, Q. How to evaluate total savings? Total...

Q. How to evaluate total savings? Total savings Total savings S(r) depends positively on the real interest rate Remember that total saving

National income statistics, discuss four weaknesses of using national incom...

discuss four weaknesses of using national income statistics in comparing living standards between two countries

What is money has nothing to do with token itself, What is money has nothin...

What is money has nothing to do with token We also consider that what is money has nothing to do with token or commodity itself: USD is money in United States but not in

Calculate the kernel estimator and plot histograms, We will look now at cha...

We will look now at changes in the income distribution of Canadians between 1991 and 2001. Use the census data for these years provided in the course web page. Download that data i

Aggregate demand and supply diagram, Using an aggregate demand and supply d...

Using an aggregate demand and supply diagram, explain how each of the following scenarios affects the equilibrium price level and aggregate output. Consider first the short-run, th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd