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Macroeconomics Macroeconomics, in contrast, looks at the output of the economy as a whole and is concerned with aggregate questions relating

to inflation, unemployment, the balance of payments, and business cycles. In macroeconomics the value of cornflakes, beer, cars, strawberries, haircuts, and restaurant meals, along with the value of all other goods and services produced is averaged together. This results into studying the movement of aggregate national product. The prices of all goods and services consumed are also averaged together and discuss the general price level for the entire economy. It is usually just called the price level (1997). Macroeconomics deals with economic factors such as total national output and income, unemployment, balance of payments, and the rate of inflation.

It is distinct from microeconomics, which is the study of the composition of output such as the supply and demand for individual goods and services, the way they are traded in markets, and the pattern of their relative prices. At the basis of macroeconomics is an understanding of what constitutes national output, or national income, and the related concept of gross national product (GNP). The GNP is the total value of goods and services produced in an economy during a given period of time, usually a year. The measure of what a country's economic activity produces in the end is called final demand. The main determinants of final demand are consumption, investment, government spending, and net exports (1997).Macroeconomic theory is largely concerned with what determines the size of GNP, its stability, and its relationship to variables such as unemployment and inflation. The size of a country's potential GNP at any moment in time depends on its factors of production labor and capital and its technology. Over time the country's labor force, capital stock, and technology will change, and the determination of long-run changes in a country's productive potential is the subject matter of one branch of macroeconomic theory known as growth theory.

Unemployment causes a great deal of social distress and concern; as a result, the causes and consequences of unemployment have received the most attention in macroeconomic theory. During the last few decades there have been numerous refinements of the Keynesian theory of unemployment. For example, although there is still much disagreement as to the importance of wage rigidity, significant progress has been made in explaining it without recourse to trade union behavior or government regulation (1997). At first it seemed difficult to reconcile the notion of wage rigidity with the usual economist's assumption that people seek to maximize utility or satisfaction and would be willing to accept a lower wage in order to get a job. However, by widening the range of variables over which individuals optimize to include variables such as loyalty and self-respect, it has become easier to reconcile labor market disequilibrium with the usual assumptions of optimizing behavior. Macroeconomic theories regarding the way that the determinants of total final demand operate form the basis of large macroeconomic models of the economy that are used in economic forecasting to make predictions of output and employment and related variables. During the last few years, the record of most such predictions has been poor, and an analysis of the errors has led to continual revisions of the basic models and refinements of the theory (1997). Macroeconomics deals with a wider range. It assesses a countrys situation and what can be done to improve it.

Oil pricing Economics has focused on natural resource availability since its inception. Early writings on the possibility of world resource production being unable to keep pace with a growing population led to economics' designation as the dismal science. However, despite centuries of predictions that we are running out, most natural resources, including oil, are still in plentiful supply. Real prices for extractive natural resources have, almost uniformly, declined with time as improvements in the technology of mining, refining, and utilization have occurred. Market prices for any commodity

represent the product of two forces particularly supply and demand. Supply is a function that describes how much of a good or service will be provided by producers, given certain conditions. Similarly, demand is a function describing how much of a good or service will be desired by consumers, under specified conditions. In their most simple formulation, both relationships can be expressed as functions of the price of the instant good or service (1995).

The supply function is almost always upward sloping in price-quantity space. It illustrates the fact that firms are willing to supply more of a good or service as price increases. Conversely, the demand function is almost always downward sloping when charted in price-quantity space, reflecting consumers' desire to purchase increasing quantities as price falls. For a hypothetical oil market the intersection of the supply and demand schedules, known as the equilibrium point, is the only pricequantity combination that satisfies both buyers' and sellers' desires and clears the market. If price is higher than the equilibrium price, sellers want to sell more oil than buyers want to buy, and the lack of buyers will cause sellers to lower prices. If price is lower than the equilibrium, buyers want to buy more oil than sellers want to sell and, as a consequence, price is bid upward (1995).

Changes in factors such as consumers' incomes and preferences, weather, population, price, and the availability of substitute goods or goods that are used in association with oil can cause the demand curve to shift. The supply curve can also shift due to cost-lowering technological innovations, changes in the prices of inputs, altering of producers' expectations regarding the future, the discovery of additional oil reserves, and other factors. An important concept is how responsive the quantities demanded and supplied are to changes in market prices. This effect is measured in economics by a term known as elasticity. If demand is very responsive to changes in the price of the instant good, then it is known as elastic. Alternatively, if demand does not change very much with a price change, it is known as inelastic (1995).

The process for supply is the same. Elasticity is different for each point along the demand and supply curves. Thus, people can observe little response due to price changes within a particular range; say at the lower end of the price spectrum, and significant response in another range, possibly at the higher end of the price spectrum. Both demand and supply are more elastic in the long term than in the short term, as buyers and sellers are better able to make price-driven adjustments over a longer time period. If markets are competitive then each market participant takes the price determined by the market equilibrium as a given. They can do nothing, acting unilaterally, to impact the price. A single buyer can refuse to purchase and exercise some control over the market price Thus, the price of oil will be influenced by all the factors that influence either demand or supply and determine equilibrium (1995). Different things contribute to the prices of oil The rise or fall of oil prices affects not only the economy but peoples daily living activities. Inflation Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events. Deflation involves a sustained decline in the aggregate level of prices, such as occurred during the Great Depression of the 1930s; it is usually associated with a prolonged erosion of economic activity and high unemployment. Widespread price declines have become rare, however, and inflation is now the dominant variable affecting public and private economic planning (1996).

When the upward trend of prices is gradual and irregular, averaging only a few percentage points each year, such creeping inflation is not considered a serious threat to economic and social progress. It may even stimulate economic activity: The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than costs; and personal, business, and government borrowers realize that loans will be repaid with money that has potentially less purchasing power (1996).

A greater concern is the growing pattern of chronic inflation characterized by much higher price increases. Chronic inflation tends to become permanent and ratchets upward to even higher levels as economic distortions and negative expectations accumulate. To accommodate chronic inflation, normal economic activities are disrupted: Consumers buy goods and services to avoid even higher prices; real estate speculation increases; businesses concentrate on short-term investments; incentives to acquire savings, insurance policies, pensions, and long-term bonds are reduced because inflation erodes their future purchasing power; governments rapidly expand spending in anticipation of inflated revenues; and exporting nations suffer competitive trade disadvantages forcing them to turn to protectionism and arbitrary currency controls. Demand-pull inflation occurs when aggregate demand exceeds existing supplies, forcing price increases and pulling up wages, materials, and operating and financing costs (1996).

Cost-push inflation occurs when prices rise to cover total expenses and preserve profit margins. A pervasive cost-price spiral eventually develops as groups and institutions respond to each new round of increases. The specific effects of inflation and deflation are mixed and fluctuate over time. Inflation initially increases business profits, as wages and other costs lag behind price increases, leading to more capital investment and payments of dividends and interest. Domestic inflation may temporarily improve the balance of trade if the same volume of exports can be sold at higher prices. Government spending rises because many programs are explicitly indexed to inflation rates to preserve the real value of government services and transfers of income (1996). Inflation is something that concerns governments. When it happens countries tries to find out what causes such and they find probable solutions.

The impact of oil prices The international oil security problem has two components. The first is the exercise of market power by international oil exporters to raise petroleum prices. While beneficial to U.S. oil producers, higher prices raise the real cost of domestic and imported oil for U.S. businesses and households, thereby crowding out other opportunities for consumption and saving (2002). The second component is macroeconomic disruptions arising from oil price instability. These disruptions became a concern during the 1970s, when oil price shocks were followed by economic downturns and inflation in the industrialized countries. Among the causes of oil price shocks are unexpected supply reductions by individual oil suppliers or suppliers as a group, unexpected surges in demand, or destabilizing inventory adjustments. Oil price shocks appear to have consequences for the economy beyond the direct effects of an increase in energy costs (2002). The dramatic oil price increase of the 1970s, which coincided with escalating rates of inflation and unemployment and decelerating rates of economic growth worldwide, was more coincidental than causal. The extent to which oil price fluctuations affect national economies is limited to the proportion of expenditures on oil to GDP, initial price levels, and the strength of the relationship between the demand for capital goods and labor and final demand. For developed countries such as the United States, Japan, and Germany from 1973 to 1989, only a small fraction of the fall in GDP growth was

the result of high oil prices (1997). The real culprits were declining investments and the stifling of development and technological diffusion brought about by fiscal and taxation policies which exerted inflationary pressure and squeezed profits and salaries.

For developing countries the decelerating growth rates they experienced were primarily caused by declines in the level and quality of investments, the availability of foreign capital, and the pattern of inflation which was related more to interest rates and public debt levels than to oil prices (1997). The increase in oil prices in the 70s was said to be the reason for the economic problems and low GDP the world encountered during those times. In these times oil price increases are also blamed as the cause of economic problems for a country. Unlike in the current era; the oil price hikes was blamed but is not the cause of the economic problems. There are certain instances wherein the hikes did not affect the economic development.

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