Qn: Explain the effect of surging fuel costs on the economy.
Interpretation of qn:
Explain - Make clear and give reasons for
Effect - Internal ( Price, Employment, Economic growth)
External ( Balance of payments, Exchange rate)
Ans:
Internal Effect:
- Prices
> Oil import is basic input for production.
> Surging fuel cost raise cost of production.
> Cost push inflation results, shifting AS curve to the left (or upward) as AS fall and push up general price level
> Inflationary spiral. Fuel cost is the trigger point for further increase in price.
- Unemployment
> Stagflation develop
> High level of unemployment create economic and social burden
> Social unrest will lower confidence of investors.
> Economy trap in vicious cycle of unemployment
- Economic growth and Equity
> Surging fuel cost affect various component of AD.
= Consumption decrease as consumers are cautious about economic outlook
= Investment decrease as business confidence fall
Interpretation of qn:
Explain - Make clear and give reasons for
Effect - Internal ( Price, Employment, Economic growth)
External ( Balance of payments, Exchange rate)
Ans:
Internal Effect:
- Prices
> Oil import is basic input for production.
> Surging fuel cost raise cost of production.
> Cost push inflation results, shifting AS curve to the left (or upward) as AS fall and push up general price level
> Inflationary spiral. Fuel cost is the trigger point for further increase in price.
- Unemployment
> Stagflation develop
> High level of unemployment create economic and social burden
> Social unrest will lower confidence of investors.
> Economy trap in vicious cycle of unemployment
- Economic growth and Equity
> Surging fuel cost affect various component of AD.
= Consumption decrease as consumers are cautious about economic outlook
= Investment decrease as business confidence fall
= Export decreases as competitiveness of export fall
= Import increases as imports become relatively cheaper
> Economic growth (real output) falls as AS and AD falls.
> Widening of income disparity
External Effect:
- Balance of payments
> Export less competitive, export earnings falls if demand for export is price elastic.
> Import more competitive, import expenditure increases if demand for import is price elastic.
> Fall in export earning and rise in import expenditure worsen balance of trade.
> Inflation in Thailand results in hot money flowing out of Thailand and decrease in inflow of investment, worsening balance of payments.
> Worsening balance of payments result in decrease in foreigners' demand for Thai baht and increase in Thailand demand for foreign currencies.
> Depreciation of Thai baht.
Evalutation:
- Thailand, an importing country, is highly dependent on fuel and hence is a loser.
- In the short run, producing countries gain from the surging fuel cost while importing countries lose.
- In the long run, all countries are losers with surging fuel cost as demand for oil from the importing countries will fall.
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