I.B. Comparative Politics and Economics (SL) Essay
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In this article, The Economist talks about how the price for a barrel of oil has dropped below the fifty dollar mark, resting at $47.36. Though many people would be happy with this, it talks about how this could be cause for alarm as a possible indicator for a worsening economy. The main economic concept described in the article would have to be consumption because it ties in with many changes that will occur as an effect of oil prices going down.
Consumption is basically what it says it is: the total spending by consumers of domestic goods and services. Another concept described in this article is that of aggregate demand, mainly because consumption is bound to it. Aggregate demand is the total spending on goods or services in a period of time at a given price. Lastly, Monetary Policy is touched on in this article since there is a deflation in prices those who control monetary policy cut interest rates.
* Consumption: Because of the drop in oil and also economist’s predictions that it will drop even lower, we can probably guess that consumers will save more money when they buy gas.
With this extra money, incomes change and go up. Income is one of the main factors of consumption because, when it rises, people have more money to spend on other things, which increases aggregate demand. Consumer confidence also plays a role in consumption and especially in this case because, if consumers believe that gas prices will become lower, then they will have a greater chance or spending more on various goods and services.
* Aggregate Demand: Changes in any of the four determinants of aggregate demand will shift it, making it lower or higher depending on which way the determinant shifts. In this case, a graph of aggregate demand would be shifting to the left because price levels are going down as the cost of oil is decreasing.
* Monetary Policy: Though not discussed to a deep extent in the article, it does say that in response to the price for a barrel of oil dropping “those setting monetary policy have had no hesitation in cutting interest rates dramatically.” They’re probably cutting them do to fears of deflation which would create a greater unemployment due to a decrease in profit. Cutting interest rates would decrease the incentive to save because the cost of borrowing would be lower, this would also increase investment.
In this graph you can see that aggregate demand will shift from a change in price level. So, if we make the price level oil and it goes down, then we have our demand for it go up and the aggregate demand line will shift to the left (AD2). If we increase the price for oil, the exact opposite will occur and the line will shift to the right (AD3). This all comes back to monetary policy and the article talking about people cutting interest so that it could build up consumer confidence in spending.
In terms of completeness of this article, I think The Economist does an overall decent job at explaining what was going on and what could come of it but I don’t think it really touched on what we should do (or what we are doing) as a country to prevent a shortage of oil. I think the article does a good job of assuming that, although we are pursuing renewable energy, oil will be with us for a while longer and that we need to jack up the prices to reduce demand so that we don’t have the shortage too soon. In the short term, the lowering of oil prices is immensely beneficial because it increases the amount of money consumers have to spend on goods and services, and it also increases consumer confidence, making them want to get loans and mortgages.