Macroeconomics. The oils price Essay Example | Topics and Well Written Essays - 2500 words

Macroeconomics. The oils price - Essay Example However, how the various economic indicators behave during this short period of 'supply shock' and how they forecast performance or health of the economy in the coming period is the moot question. Inflation may be defined as "state of economy, where there is a general and abnormal rise in price of all goods and services". Recession is a state of economy where there is a "slump in Gross Domestic Product in two or three successive quarters of a year with general price rise or fall". In the short run, when a price of a product which is consumed every sector of the economy which contribute to GDP have suddenly risen, other things remain the same, lead to rising prices all commodities and services, fall in real value of money and slow down of economic growth. This phenomenon is attributed to 'supply shock'. Built-in inflation - induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle". Built-in inflation reflects events in the past, and so might be seen as hangover inflation. It is also known as "inertial" inflation, "inflationary momentum", and even "structural inflation. Cost Push inflation or Supply... Built-in inflation - induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle". Built-in inflation reflects events in the past, and so might be seen as hangover inflation. It is also known as "inertial" inflation, "inflationary momentum", and even "structural inflation. SUPPLY SHOCK INFLATION OR COST PUSH INFLATION: Cost Push inflation or Supply Shock inflation is caused by the rise in price of an important commodity for which there was no alternative, and consequent of which there was a general rise in price of all commodities and services. While the examples for cost push inflation are many viz., failure of monsoon/draught in an agrobased economy which would shoot up inflation etc.,. the best example in the modern industrialised countries, is rise in prices of petroleum prodoucts. Dependence to petroleum products in any economy need not be emphasised and it may not be forgotten that the crisis faced by the world in the year 1970 is attributed to the rise in oil prices all over the world. Since, petroluem is important for moving the economy in all industrial including agricultural dependent countries, any upward movement in the price will cause a cascading movement in the price of all commodities and services and it will have persistant effect. However, there are different school of thought which opine, that the reduction in oil price after 1970 have not contributed in reduction in general price level, hence, rise in oil prices have not directly caused inflation in 1970. However, Keynesian economists argue that many prices are 'sticky