Question

a one page typed paper on a current event (you can obtain your current event from a newspaper, online, magazine article, date/time/name of a television or news broadcast). The scope of your current event can be local, regional, national or even international. You will need to:

Identify the source of your current event.

Summarize the article and its main findings (what were the main take away points?)

Papers require analysis using a formal economic model and graph to be included in your paper.

focus on how your current event is linked macroeconomics

explain your opinion on how it directly impacts the economy.

Answer 1

Why are oil prices rising?

It is likely that both increases in demand and fears of supply disruptions have exerted upward pressure on oil prices.2Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity. A large reason is that developing nations, especially China and India, have been growing rapidly. These economies have become increasingly industrialized and urbanized, which has contributed to an increase in the world demand for oil. In addition, in recent years fears of supply disruptions have been spurred by turmoil in oil-producing countries such as Nigeria, Venezuela, Iraq, and Iran .

The breathtakingly sharp increase in the price of oil in the last half of 2007 and first half of 2008 has led many to argue that increased speculation in commodity markets has played a role, and indeed there is evidence of increased activity in these markets. However, whether speculation is playing a role in high oil prices is open to debate . It is also useful to remember that both the demand for and the supply of oil react sluggishly to changes in prices in the short run, so very large changes in prices can be required to restore equilibrium if demand should move even modestly out of line with supply.

As far as the implications of higher oil prices, there are both microeconomic and macroeconomic answers to that question. I will address both of these aspects in turn.

How do high oil prices affect the economy on a “micro” level?

As a consumer, you may already understand the microeconomic implications of higher oil prices. When observing higher oil prices, most of us are likely to think about the price of gasoline as well, since gasoline purchases are necessary for most households. When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place or that use fuel as a major input (such as the airline industry). Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do.

It turns out that oil and gasoline prices are indeed very closely related.

What effects do oil prices have on the “macro” economy?

Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.     

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

High oil prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future. One way to analyze the effects of higher oil prices is to think about the higher prices as a tax on consumers. The simplest example occurs in the case of imported oil. The extra payment that U.S. consumers make to foreign oil producers can now no longer be spent on other kinds of consumption goods.

Despite these effects on supply and demand, the correlation between oil price increases and economic downturns in the U.S. is not perfect. Not every sizeable oil price increase has been followed by a recession. However, five of the last seven U.S. recessions were preceded by considerable increases in oil prices