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Evaluate the impact which a series of increases in oil prices might have on the performance of the UK Free essay! Download now

Home > A Level > Economics > Evaluate the impact which a series of increases in oil prices might have on the performance of the UK

Evaluate the impact which a series of increases in oil prices might have on the performance of the UK

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Downloads to date: N/A | Words: 1349 | Submitted: 19-Oct-2011
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Evaluate the impact which a series of increases in oil prices might have on the performance of the UK essay previewEvaluate the impact which a series of increases in oil prices might have on the performance of the UK essay previewEvaluate the impact which a series of increases in oil prices might have on the performance of the UK essay preview

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The impact which a series of increases in oil prices might have on the performance of the UK

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Evaluate the impact which a series of increases in oil prices might have on the performance of the UK.

Oil is a raw material which is needed all over the world, but is only found in certain countries who export the oil for the use of other countries. UK and other countries are big importers of oil from other countries such as Saudi Arabia. Saudi is a good example of a main exporter of oil and most of the UKs oil is imported from these big exporters.
Many people underestimate the significance of oil in modern civilization, and mainly associate oil with the petrol or diesel that they put in their cars. However, the value of oil to our world goes far beyond our personal transportation choices as many of the everyday items we use are either made from oil or is dependent upon oil for their production.
Oil is a cost of production and hence the possibility of cost-push inflation. Cost-push inflation is a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available. An example of cost-push inflation is of the oil crisis of the 1970s, which some economists see as a major cause of the inflation experienced in the Western world. It is argued that this inflation resulted from increases in the cost of petroleum. Since petroleum is so important to industrialized economies, a large increase in its price can lead to the increase in the price of most products, raising the inflation rate.
Keynesians argue that that instead of prices falling, a supply shock would cause a recession, i.e., rising unemployment and falling gross domestic product. It is the costs of such a recession that likely cause governments and central banks to allow a supply shock to result in inflation. They also note that though there was no deflation in the 1980s, there was a definite fall in the inflation rate during this period. Actual deflation was prevented because supply shocks are not the only cause of inflation.

The graph above illustration of aggregate supply (AS) shifting to AS' and causing price level to increase while output shrinks.
Oil prices, associated with bouts of inflation and economic instability over the last 30 years, have been rising in recent months. We argue that the inflationary consequences of a rise in oil prices depend upon the policy response of the monetary authorities. They can improve the short term impacts on output, but only at the cost of higher inflation. In the short term the size and distribution of output effects from an increase in oil prices depends on the intensity of oil use in production. Higher oil prices change the ...

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