Although the United States Is on the right path for becoming OLL independent and is enjoying increased production, it has the ability to negatively affect our country’s economy at the same time. Decreasing unemployment rates has been a main focus for the last few years and big businesses that rely on massive amounts of oil are having a hard time hiring more employees because their production costs remain so high. Oil companies are certainly being greedy with their extremely profitable business and the rest of America Is feeling the negative impact. The U. S. Nuns a market system style economy also known as capitalism. This means individuals and businesses make their own economic decisions and set out to achieve their goals. In this case the U. S. Oil companies price the oil they produce based off the nation’s aggregate demand. The United States’ and especially the foreign nations’ aggregate demand is respectively high at this time and oil companies are taking advantage of their market system economy in which they belong to. However this country Is not a pure capitalistic country meaning government has little say with the market pricing of 011.
It seems Like the 011 companies tend to keep prices just high enough; to maximize their profits while not overly creating a negative impact on America’s economy. The U. S. Overspent has limited ability to influence the oil companies pricing and works to keep gas prices bearable for most businesses and individuals. In this modern day scenario, aggregate demand Is showing a major Increase because of the Increase In foreign countries who Import our 011. Aggregate demand Is defined as a schedule (or curve on a graph) that shows the amount of a nation’s output (also known as GAP) that consumers desire to buy at every possible price.
With the aggregate demand showing an increase for the United States’ oil, the AD curve would display a shift to the right, representing that consumption has increased t every possible price level. If one or more determinants of aggregate demand change, the curve will shift to the left or the right. These determinants of aggregate demand Include changes In consumer spending, Investment spending, government spending and net export spending. Relating to the oil business, American consumer spending and net export spending have adjusted recently.
Consumer spending may have slightly decreased with more fuel efficient technology but this country is exporting much more fuel than it is importing and this is what pushes the aggregate demand curve to the right. An AD curve typically shows a downward sloping curve oil are desired for purchase as the price level increases. With aggregate demand increasing so rapidly between all domestic and foreign consumers, U. S. Citizens most likely will not see a decline in price as long as this continues. Although there are some downfalls for oil consumers in the United States with this country being a main exporter, there are some benefits.
The American dollar will strengthen with continuance of these massive amounts of oil exporting to foreign places. The U. S. Economy could mainly benefit from this because it virtually makes reign products cheaper for businesses and consumers to purchase. Keeping production costs as low as possible is a key aspect for a growing and profitable company. Along with cheaper foreign products for everyone in the U. S. , the economy unfortunately also sees a downfall in exports of all other products. When U. S. Products cost more than other foreign products, fewer U. S. Sports will be desired and therefore aggregate demand for many of the U. S. ‘s products will decrease. It is difficult for the unemployment rate to improve when foreign countries buy fewer domestic products and oil is driving up production costs for the companies that ensure large amounts of oil and gas. Most business owners and individuals in the U. S. Are hoping oil prices will decrease since we are producing so much of our fuel, but really the aggregate supply curve is shifting to the left, therefore decreasing. With aggregate demand being so high, as previously discussed, the aggregate supply is actually decreasing.
Aggregate supply can be defined as a schedule (or curve) displaying the relationship between gross domestic output and a nation’s price level. The three main factors that shift the aggregate supply curve include changing input prices, productivity and legal- institutional environment. The main factor in this scenario that shifts the aggregate supply curve to the left would be the fluctuating input prices. One can see an increase in price level as real domestic output increases because aggregate supply curves tend to curve upward (direct relationship between price level and GAP).
The United States is producing more oil than ever, therefore increasing the national GAP and resulting in an increase in price level. With the United States continually increasing oil production and exporting, there very well may be an increase in the ratchet effect. The ratchet effect is an analogy describing the effects on the price level due to changes in aggregate demand. As aggregate demand increases along the aggregate supply curve, product prices, wage rates and per-unit production costs are highly flexible upward.
The downfall to this is if aggregate demand eventually decreases, product prices, wage rates and per-unit production costs are inflexible, and therefore difficult to adjust downward with the aggregate demand. A scenario where price level actually adjusts downward with aggregate demand very rarely occurs, but was recently experienced during 2009. If the U. S. ‘s aggregate demand falls from decreasing oil exports, it could result in very slow economic growth because per-unit production costs, wage rates and product prices typically do not decrease.
These three main costs and prices are inflexible downward because they are described as menu costs. The reasoning behind this analogy comes from the issues restaurants experience when a recession occurs, and they do not want to spend the money to lower their costs on the menu to better and therefore they try to avoid doing so. Along with the cost of reducing prices, there is also the fear of price wars between firms. A price war is where firms lower their prices to be more competitive and other firms in the same field retaliate by lowering their prices even lower.
In situations like these it is impossible for the U. S. Economy to grow as needed because firms cannot be nearly as profitable. Based off this explanation of menu costs one can see the importance of maintaining national aggregate demand for U. S. Oil and how these raising prices and costs could be a minor threat to the growth of the U. S. Economy. Higher oil prices in the United States takes a large toll on company’s profits that rely on using a great amount of oil in reduction. Along with higher production costs, comes lower profits, less employees and still a high unemployment rate here the United States.
These high production costs contribute to the rate of inflation. Inflation is defined as a rise in the general prices within an economy. A demonstration used to describe the relationship between the unemployment rate and annual rate of inflation is known as the Phillips Curve. The Phillips Curve illustrates an inverse relationship between unemployment and inflation, where the curve slopes downward and to the right. This means the rower the unemployment rate within an economy, the higher prices generally will be. The U. S. S growth in its oil exporting industry is causing the economy to not follow this expected inverse relationship. The annual inflation rate continues to rise (especially for oil), but these rising prices are hurting major businesses’ profits and therefore the unemployment rate is not decreasing at a rates this country needs it to be. Although aggregate demand for the U. S. ‘s oil is so much higher than ever before, keeping the price affordable for big businesses especially, is something that could verbal benefit our economy with lower unemployment rates.
Based off this class’s main reading, Economics Principles, Problems and Policies, the more goods a country is exporting, the number of Jobs and income increases. Exporting more goods has the same result on the economy than does an increase in consumption and investment. All of these expenditures and items being sold to foreign countries are known as aggregate expenditures. From a microeconomics standpoint, the massive amounts of oil that the U. S. Is exporting is a good example of how more Jobs are being made within the oil companies and how those employees are making a higher income.
But, from a macroeconomics standpoint, the oil industry effects on the U. S. Economy do not necessarily display the same listed outcomes. The oil industry is an interesting business because its sales and prices all have a great impact on most all other businesses. This being said, there may be more Jobs within the oil and shipping firms with this country’s high aggregate expenditures, but all other companies relying on oil are unable to expand at their desired rate, and therefore is slowing down the U.
S. Economy’s overall growth. Reductions in per-unit production costs due to increasing output levels are known as economies of scale. As the U. S. Exports more and more oil, the small amount of companies (around 20) who produce it will reduce their per-unit production costs and be more profitable. What frustrates consumers and businesses are the oil company’s massive amounts of growing profits and yet oil prices in the U. S. Are still going up.
I would like to see policy changes that allow our government to apply higher tax rates to the companies that produce and export oil. This would help become more profitable, hire more employees and help grow the U. S. Economy. One economic downturn the U. S. Just focus on avoiding is known as the Dutch Disease. From an economic standpoint this setback describes a nation who increases their exploitation of natural resources and exports them to foreign countries while starts manufacturing fewer products.
When a country exports more natural resources the currency of that country grows stronger and fewer foreign countries will be able to afford the manufactured products (as previously discussed). Keeping a well-rounded production of exports is important to an economy because it can keep a country economically stable and more resistant to recessions. As the U. S. ‘s oil production entities to rise, it is essential to avoid making the mistakes which lead to the Dutch Disease.
Many may find the United States’ growing oil industry a huge discovery and as a great way to uplift our economy, but there are certainly some downfalls and threats to over expanding this industry. As a nation, unemployment rates have not decreased mainly due to continually rising gas and production costs. Over strengthening of the U. S. Dollar can negatively affect sales of other major U. S. Exports. Better ways need to be studied on how to leverage this growing industry while allowing the rest of the nation to benefit from lower fuel prices.