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Oil production and macroeconomic adjustment under different wage assumptions

Journal Article


Abstract


  • Oil production and its macroeconomic effects were given extensive coverage, in the UK in particular, during the early 1980s, using the principles of the Dornbusch (1976) model. However this framework has proved to be inadequate owing to its exclusion of wealth effects from developments in the current account, and by its insufficient attention to non‐oil output supply considerations. This paper attempts to overcome such deficiencies in analysing the macroeconomic effects of oil production, and is based upon an economy where the spending effect from oil production dominates the resource movement effect. The production of oil not only generates additional demand for non‐oil output and money, but also contributes to a major improvement in the current account performance. Such an improvement creates wealth effects, which have a feedback effect on the economy. Oil production is also likely to have an impact on the supply of non‐oil output. The wage‐price nexus proves to be particularly important for explaining developments in non‐oil output supply in this regard, both during and after the period of oil production. Adjustments in wages to developments in prices, is given considerable emphasis here. The primary objective here is to develop a framework conducive to the analysis of the macroeconomic effects arising from oil production, in a country where such oil production possesses certain characteristics. Because of the model's complexity, a mathematical derivation of its dynamics of adjustment and comparative statics has been downgraded, in favour of a simulation analysis of the model under alternative wage adjustment assumptions and given oil production characteristics. This enables a more detailed discussion of the macroeconomic adjustment processes at work. From these simulations it becomes apparent that the macroeconomic adjustment process for non‐oil output, in particular, is crucially affected by the wage adjustment assumption adopted. Copyright © 1990 John Wiley & Sons, Ltd

Publication Date


  • 1990

Citation


  • Harvie, C. (1990). Oil production and macroeconomic adjustment under different wage assumptions. International Journal of Energy Research, 14(3), 355-369. doi:10.1002/er.4440140310

Scopus Eid


  • 2-s2.0-0025196960

Web Of Science Accession Number


Start Page


  • 355

End Page


  • 369

Volume


  • 14

Issue


  • 3

Abstract


  • Oil production and its macroeconomic effects were given extensive coverage, in the UK in particular, during the early 1980s, using the principles of the Dornbusch (1976) model. However this framework has proved to be inadequate owing to its exclusion of wealth effects from developments in the current account, and by its insufficient attention to non‐oil output supply considerations. This paper attempts to overcome such deficiencies in analysing the macroeconomic effects of oil production, and is based upon an economy where the spending effect from oil production dominates the resource movement effect. The production of oil not only generates additional demand for non‐oil output and money, but also contributes to a major improvement in the current account performance. Such an improvement creates wealth effects, which have a feedback effect on the economy. Oil production is also likely to have an impact on the supply of non‐oil output. The wage‐price nexus proves to be particularly important for explaining developments in non‐oil output supply in this regard, both during and after the period of oil production. Adjustments in wages to developments in prices, is given considerable emphasis here. The primary objective here is to develop a framework conducive to the analysis of the macroeconomic effects arising from oil production, in a country where such oil production possesses certain characteristics. Because of the model's complexity, a mathematical derivation of its dynamics of adjustment and comparative statics has been downgraded, in favour of a simulation analysis of the model under alternative wage adjustment assumptions and given oil production characteristics. This enables a more detailed discussion of the macroeconomic adjustment processes at work. From these simulations it becomes apparent that the macroeconomic adjustment process for non‐oil output, in particular, is crucially affected by the wage adjustment assumption adopted. Copyright © 1990 John Wiley & Sons, Ltd

Publication Date


  • 1990

Citation


  • Harvie, C. (1990). Oil production and macroeconomic adjustment under different wage assumptions. International Journal of Energy Research, 14(3), 355-369. doi:10.1002/er.4440140310

Scopus Eid


  • 2-s2.0-0025196960

Web Of Science Accession Number


Start Page


  • 355

End Page


  • 369

Volume


  • 14

Issue


  • 3