Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016 - Edexcel - A-Level Economics A - Question 8 - 2017 - Paper 2
Question 8
Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016.
Evaluate the likely macroeconomic consequences of a significant fall in global oil prices.
Worked Solution & Example Answer:Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016 - Edexcel - A-Level Economics A - Question 8 - 2017 - Paper 2
Step 1
An increase in overall economic activity (real GDP)
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A significant fall in oil prices can lead to an increase in overall economic activity, as firms face lower production costs. This effect is particularly pronounced for industries heavily dependent on oil inputs. For instance, a 10% fall in oil prices could spur GDP growth by approximately 0.1 to 0.5 percentage points.
Step 2
Impact on various sectors of the economy
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Industries such as agriculture and travel may experience growth due to reduced input costs. Businesses dependent on oil will benefit from lower expenses, ultimately passing savings to consumers.
Step 3
Benefits for consumers
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Consumers may see a decrease in transportation and utility costs as oil prices drop, leading to higher disposable income. This can stimulate consumer spending and contribute positively to overall economic growth.
Step 4
Challenges for oil producers
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Oil-producing countries may face significant challenges including reduced revenue and potential unemployment as prices collapse. This can have macroeconomic implications, affecting tax revenue and leading to budget deficits.
Step 5
Financial market instability
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The falling oil prices can lead to instability in financial markets, particularly for economies heavily reliant on oil exports. This instability can further impact stock markets, with a cascading effect on overall economic confidence.
Step 6
Externalities and technological changes
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The externalities arising from fluctuating oil prices may encourage the development of alternative energy solutions and newer technologies aimed at reducing reliance on fossil fuels, shifting the economy's long-term trajectory.
Step 7
Conclusion
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In conclusion, the fall in global oil prices likely results in a mixed set of macroeconomic consequences, with benefits for consumers and certain sectors, while posing challenges for oil producers and contributing to market instability. The overall effect on the economy will depend on the duration of the price drop and the responses of various stakeholders.
