effects on global economy of lower energy prices (3)

Question 1

what are the macroeconomic effects of lower energy prices on the global economy

Answer 1

• reduced cost-push inflation -> lower energy prices -> lower production costs -> SRAS outwards -> price level falls -> reduced CPL
• actual eco. growth -> lower costs for petrol, heating, electricity -> cost of living fall -> real incomes rise -> more disposable income -> incr consumption (60% AD in the UK) -> AD up -> real GDP up -> +ve mulitplier effect
• improved current account -> energy importing nations (e.g. UK, Germany, India) spend less on energy imports -> improved deficit; vice versa for energy-exporting economies e.g. Saudi Arabia + Venezuela -> less demand for currency since it is cheaper -> currency may depreciate -> imports more expensive for energy-exporting economies -> may lead to cost-push inflation

Question 2

evaluate the macroeconomic effects of lower energy prices on the global economy

Answer 2

• benefits are uneven; economies reliant on oil and gas exports (e.g. Saudi Arabia, Venezuela, etc.) -> falling prices = lower export revenues -> weaker gov. budgets -> less funds available for public expenditure -> slows growth
• if inflation is already low, further disinflation from falling prices -> could lead to deflation -> less incentive to invest -> limited growth as AD will not rise as much
• financial sector can provide forward markets -> energy prices are fixed regardless of future fluctuations -> export revenues will not fall significantly

Question 3

what are the microeconomic effects of lower energy prices on the global economy

Answer 3

• impact on firms -> lower energy prices (for energy-intensive industries e.g. steel, manufacturing) -> reduced production costs (fixed) -> higher revenues -> more funds available to reinvest -> incr dynamic efficiency/can benefit from technical EoS -> enhanced product quality
• impact on consumers -> lower production costs can be passed down to consumers -> lower prices = higher consumer surplus -> extension in quantity demanded
• effect on renewable energy sector -> lower prices for fossil fuels -> less incentive to invest in renewable energy (e.g. wind, solar) as they are less price-competitive -> slows transition to sustainable energy sources -> -ve externalities in production persist (e.g. CO2 emissions, pollution, etc) -> market failure due to underinvestment in green technology

Question 4

evaluate the microeconomic effects of lower energy prices on the global economy

Answer 4

• in industries with inelastic demand (e.g. transport + food production due to their high degree of necessity) -> low costs may not be passed down -> consumer surplus may not change -> BUT will increase the firm’s profitability
• industries with strong market power (i.e. oligopolies in arilines + supermarkets) -> costs savings not passed down to increase producer surplus
• wage stickiness would prevent firms from reducing costs further -> limits the full benefits of cheaper energy
• gov. can intervene i.e. subsidising renewable energy or cabron taxes -> artificially maintains competitiveness of renewable energy

Question 5

application points: gov. policies to encourage green technology

Answer 5

EU’s Green Deal; UK -> Net Zero 2050 target