The Global Macroeconomic Effects of Changing Oil Prices

  • Graham Bird


One of the principal economic phenomena of the period since the early 1970s has been the fluctuating price of oil. As shown by Table 12.1 this rose dramatically in 1973–74, rose again at the end of the 1970s and then stabilised and fell during the first half of the 1980s.


Real Wage Leftward Shift Macroeconomic Consequence Marginal Propensity Average Propensity 
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Notes and References

  1. 1.
    Changing oil prices have been put forward as just one explanation of variations in global macroeconomic performance since the early 1970s. For a review of alternative explanations, see chapter 2 of Graham Bird’s World Finance and Adjustment: An Agenda for Reform (London: Macmillan, 1985).CrossRefGoogle Scholar
  2. 2.
    Short-term real interest rates for the major industrial countries were −0.3 in 1976, −0.5 in 1977 and −0.3 in 1978.Google Scholar
  3. 3.
    However, there remains some debate in the literature concerning just how inflationary was the increase in oil prices. A counter argument is that the increase in oil prices simply reflected a response to increasing demand and was not a cost-push phenomenon.Google Scholar
  4. 4.
    The economics of international debt are not examined here. Interested readers can easily sample the ever-growing literature on the subject.Google Scholar
  5. 5.
    This is a particular feature of the ‘relative income hypothesis’, which is explained in most intermediate macroeconomics texts in the chapter dealing with the consumption function.Google Scholar
  6. 6.
    Changing oil prices will also influence exchange-rate expectations. Much has been written about the so-called ‘Dutch disease’ under which discovery of a natural resource or a rise in its price will cause exchange-rate appreciation which may have adverse consequences for the economy. Similarly, a fall in (say) the price of oil might lead to a fall in the exchange rates of oil producers. It is interesting to note, and intriguing to try and explain, that while the rise in oil prices at the end of the 1970s seemed to result in a sterling appreciation, the fall in oil prices in 1986 did not lead to an equivalent depreciation. Again the evidence seems to suggest that simple and unicausal models of exchange determination are misplaced. Furthermore, there may be downward rigidities in exchange rates just as there are in some other prices.Google Scholar
  7. 7.
    It may also be noted that falling oil prices can create severe problems for oil-producing countries especially if these countries are heavily indebted. To the extent that these countries are forced to cut back on imports in order to strengthen their balance of payments, a demand deflationary impact may be transmitted to the rest of the world. This needs to be set against the otherwise generally expansionary effects of falling oil prices.Google Scholar

Copyright information

© Graham Bird 1987

Authors and Affiliations

  • Graham Bird
    • 1
  1. 1.University of SurreyUK

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