Evaluate the likely macroeconomic consequences of a significant fall in global oil prices Flashcards
Impact on importers (reduction in production costs)
KAA1 points
KAA: A fall in global oil prices will likely reduce the cost of production for firms, particularly in energy-intensive industries.
Example: Lower oil prices will decrease the cost of raw materials and transport, benefiting industries such as manufacturing, logistics, and transportation (e.g., airlines and shipping companies).
Chain of Reasoning:
Fall in oil prices → Reduction in energy costs and transportation costs → Lower production costs for firms → Increased profitability for firms → Potential for increased investment and expansion.
Real-life Example: In 2014, global oil prices dropped significantly, and companies in energy-intensive industries like airlines and transportation experienced lower operating costs, boosting profitability and investment.
Diagram: A cost curve diagram showing a rightward shift in the short-run aggregate supply (SRAS) curve due to lower production costs.
Impact that other factors may have
Eval 1
The benefits of lower oil prices may be outweighed by other negative factors, such as low oil prices reducing the profits of oil-producing countries.
Evaluation: While lower oil prices benefit firms, countries that are major oil exporters, like Russia, Venezuela, and Saudi Arabia, could face reduced government revenues from oil exports. This could harm global economic stability, potentially offsetting the benefits for non-oil-producing countries.
Consumers
KAA2
KAA: Lower oil prices lead to lower fuel costs for consumers, which increases disposable income and boosts consumer spending, stimulating overall economic growth.
Example: Lower petrol prices mean consumers spend less on fuel, freeing up income to spend on other goods and services (e.g., retail, dining, and entertainment).
Chain of Reasoning:
Fall in oil prices → Lower fuel prices → Increase in disposable income for consumers → Higher consumer spending → Increased demand for goods and services → Stimulated economic growth.
Real-life Example: In 2015, the U.S. saw a boost in consumer spending following a sharp drop in global oil prices, with retail sales and household spending increasing as consumers spent less on energy.
Diagram: A AD/AS diagram showing an outward shift in aggregate demand (AD) due to increased consumer spending.
Eval 2
The impact on consumer spending may vary depending on the overall economic situation and the income distribution.
Evaluation: While lower oil prices can increase disposable income, the benefit may be less significant for high-income households that spend a smaller proportion of their income on fuel. In addition, if consumers are concerned about other economic factors (e.g., inflation, unemployment), they may not increase spending despite the savings on fuel.
