effects of volatile commodity prices e.g. coal (3)

Question 1

macroeconomic effects on volatile commodity prices e.g. coal

Answer 1

• unstable current account + fluctuations in growth -> fluctuations in export revenues -> unstable currency account balance -> coal is a major export (risk of primary product dependency + overdependence) -> rising coal prices = incr export revenue -> improved current account -> higher net exports -> incr demand for currency -> currency appreciation -> other exports are more expensive in foreign markets -> reduced price-competitiveness -> less export revenue. CONVERSELY -> coal prices fall -> deteriorating TOT -> worsens CAD (if import prices remain high)
• unstable tax revenue -> mining firms profit levels fluctuate -> unstable gov. budget -> low tax revenue = less spending on infrastructure + welfare -> lower eco. growth (potential for education + healthcare) -> incr poverty + inequality

Question 2

evaluate the macroeconomic effects of volatile commodity prices e.g. coal

Answer 2

• depends on the % of GDP includes commodity exports ie in the UK 1% of AD = net exports
• depends on the PED/YED of importing countries
• central bank can use monetary policy to adjust exchange rates + fix current account deficit (if satisfying MLC)

Question 3

microeconomic effects of volatile commodity prices e.g. coal

Answer 3

• fluctuating revenues for producers -> incr global coal prices -> higher revenue -> incr reinvetment in capital + research & development -> incr in dynamic efficiency + lower LRAC -> however if prices fall -> firms may shut down if P<AVC (SR) or ATC(LR) -> uncertainty reduces willingness to invest -> less competitiveness -> risk of X-inefficiency -> unnecessarily high production costs
• higher costs for consumers -> demand for coal is a composite demand -> energy costs increase lead to increased costs for steel (used for machinery) -> producers may pass on these costs -> reduced consumer surplus -> harms consumer welfare

Question 4

evaluate the microeconomic effects of volatile commodity prices e.g. coal

Answer 4

• buffer stock schemes may be implemented to prevent price fluctuations -> protects domestic businesses
• financial markets may help with through forward contracts
• firms may switch to alternative, more sustainable sources to mitigate cost increases