Oil Prices, Industrial Prices and Outputs: A General Equilibrium Macro Analysis

Chichilnisky, G. (1983). Oil Prices, Industrial Prices and Outputs: A General Equilibrium Macro Analysis. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-83-126

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Abstract

A two-region general equilibrium macro model is constructed to explore the impacts of oil prices on output, employment and prices of goods in industrial economies.

The industrial region is a competitive market economy that produces two goods (consumer and industrial) with three inputs (capital, labor and oil). It trades industrial goods for oil with another region. The oil-exporting region is a monopoly which sets the price of oil. The general equilibrium of the model determines endogenously the price and level of output of industrial goods, the volume of exports and imports, and the utilization and prices of factors in the industrial economy.

The results show that an increase in oil prices can have a number of outcomes. Depending on the initial oil price, the real revenues of the oil exporter may either increase or decrease. The rate of profit and net value of output in the industrial economy may also either decrease or increase, depending on initial prices. This paper examines different regimes, looking at their policy implications, and in particular the possibility of the importer and exporter adopting cooperative pricing policies.

A computer program (in BASIC) describing the model together with a number of runs are given in the Appendix.

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