Affects of Oil on the Potential Level of Output
Logistics and Statistics | Market Movements | Comparison | OPEC | Oil: Post 9/11
Potential Level of Output
The increase in the price of crude oil hurts everyone from the consumer to the businesses that have to transport their goods. As the price of crude oil goes up the amount of disposable income regular consumers have goes down; reducing consumption and shifting the potential level of output back and to the left.
Q= C+I+G+(X-M)
Disposable Income (decreases) => C (decreases)
Q(decreases)= C(decreases)+I+G+(X-M)
With the increase in crude oil prices, businesses have to pay higher shipping costs to get their goods to market and so they reduce labor costs by deacreasing demand, which leads to a lower amount of labor. A reduction in the amount of labor will also decrease aggregate supply, shifting it back and to the left. With everything else remaining the same, if price of crude oil rises, then the potential level of output will decrease and the price level will increase.
Logistics and Statistics
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Market Movements
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Comparison
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OPEC
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Oil: Post 9/11
