Essay on Current Economic Events and How It Relates to the Principle of Macroeconomic

Introduction

Macroeconomics involves general economics at large. It covers wide range of fields such as growth in the rate of production, high number of unemployed people, abnormal increase in prices of commodities, instability in government of states, and natures of exports and imports. Microeconomics and macroeconomics complement each other as strong pillars in the economy of any given state.

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Inflationary increase in prices of goods and services as a macroeconomics principle is discussed below. Inflation is generally the rise in price levels. It is a big threat to the growth to the economy of a country. The high dependence of Latin American economies on the exports and the variation in the international prices of commodities has been studied extensively in the economic literature over the years. Far from considered a subject of the past, this acquires a greater relevance in the present the challenges that the international crisis imposes on the region. In an Economic Report of October 2011, the IMF highlighted that: "Latin America continues to be exposed to risks related to basic products, as they did four decades ago, making it more vulnerable to a sharp drop in the international prices of these products. " To its once in the report of April 2014, this same body publishes "perspectives regional governments - Latin America and the Caribbean - remain overshadowed by a series of downside risks. The main risk is a steeper fall than expected from the raw material prices caused by the weakening of the demand of some of the main economies that import raw materials, especially China. The graph below shows the relationship between price levels and the real gross domestic product of a state. Prices increase due to an increase in the aggregate demand of a product.

One of the main limitations of interaction analysis of the determinants of long-term economic growth and the existence of more or less transitory macroeconomic imbalances is the absence of an adequate theoretical framework. The articulation between the short and the long term in a common theoretical framework is one of the subjects pending in the macroeconomic analysis. This integration has been attempted from three different approaches which inflation has a negative effect on the long-term sustainable growth rate.

The OECD economies went through, between 1973 and 1984, a period of macroeconomic instability that led to the aforementioned rate. From annual inflation at levels close to113.0%, three times higher than the average observed in the previous decade. Since the beginning of the years eighty, control of inflation has become a goal priority of economic policy in the industrialized countries, inspiring the reform of some institutions and the appearance of new ones, both national as international coordination. This orientation of the economic policy is supported by the recommendations of the agencies international economies and has made its way through the broad consensus existing between monetary authorities, economists and the public in general, in relation to the advantages of maintaining the price stability. In effect: disinflation processes can costs in the short term (1), although the benefits of them derived can be very substantial and manifest themselves fundamentally in the medium and long term. The existence of a correlation between inflation and short-term unemployment has contributed to the macroeconomic debate during long time. However, the economic literature suffers from the lack of a rigorous and conclusive evaluation of the negative effects of inflation over long-term production growth.

Inflationary increase in prices of goods and services as one of the events happening all over the universe .oil prices for instance have been increasing from time to time. This rise in price leads to subsequent rise in the price of gasoline which affects the majority households and businesses. Statistics have shown that rise in the price of oil leads to rise in inflation which causes low economic growth. This is clearly seen through the direct rise in the prices of petroleum based products. The rise also causes indirect effects on the cost of transportation and industrial manufacturing industries. Thee rise in the price of other products is as a result of the traders passing the production cost to the customers. The figure below shows a graph showing how the prices of food rise with the rise in oil prices. The definition of the price of oil that is relevant for the economic agents must take into account the exchange rate and the indirect taxes that fall on this product. However, this article will not consider the impact of taxation and, although the exchange rate is included, the effect is not taken into account that the appreciation or depreciation of the currency may have on the competitiveness of the economy and, therefore, on the potential product.

After the economic crisis of the 1980s in the United States, there was a growing interest among economists to identify and quantify the relationship between the prices of energy goods, mainly oil and real variables: GDP growth, private consumption, - among others. In general, there seems to be a causal link between the economic crisis and the increase in oil prices. Although these two phenomena have been presented contemporaneously on several occasions, the empirical evidence obtained for several countries, mainly developed economies, does not support the widespread belief that high oil prices are generators of economic crises (Krugman, 2008). In Colombia, for instance during 2015, the price of oil reached low prices that had not been seen for almost six years. The constant fall that occurred during 2014 and up to the first quarter of 2015, approximately 51%, put the national government in a difficult position due to the collection generated from the production of crude oil in Colombia, generating low expectations. Growth in the economic sector and reduction of fiscal resources coming from the exploitation and exportation of the natural resource.

In general, the economies dependent on the mining-energy sector present a risk of reducing their levels of growth, to the extent that the capital inflows destined to finance the mining investment predominate over the rest of the investment flows and proportionately increase the income from their exports. . This phenomenon involves strong pressures on the exchange rate and the tendencies towards the appreciation of the local currency.

The volatility can be measured by the variability or dispersion of a data set in a time frame. Volatility in the oil market adds uncertainty and damages the business climate in economies, whether these are net importers or exporters. HE can calculate it by various methods: the standard deviation, the coefficient of variability of changes in values, and others. In this case, we are interested in comparing the variability of oil prices in the current conjuncture (2000-2005) and infer about its intensity in relation to other oil junctures. For this purpose, the standard deviation as a measure of volatility. It was calculated using the monthly data on oil prices in the world market in the last 25 years (January / 1980 - April / 2005), by the following method:

The cyclical movements of the world economy are have reflected in oil prices and in the changes suffered by the hydrocarbon market. After of the contraction of world demand in 2009, the rebound of the economies was reflected in an increase in the prices of crude oil that remained until mid of 2014. This being the case, for the Brent reference, the contributions gradually increased from an average US $ 62 per barrel in 2009 to more than US $ 100 per barrel between 2011 and 2013. In this strengthening of the price of oil and its derivatives contributed not only market factors but also a combination of international elements such as Fukushima nuclear accident and political instability in oil producing countries.

Conclusion

Fall in the prices of oil has a direct impacts on the economy through the impact it has on the consumer price levels. This causes a subsequent indirect low growth on the wage growth. There is also a decrease in the investment rate in the oil industry. As industrialization takes place in countries, the demand of oil also increases as there is a large consumption in running the industries.

References

Krugman, P. (2008). Fuels on the hill.

Brown, S. (2006). Making sense of high oil prices-a conversation with Stephen PA Brown. Southwest Economy, (Jul), 8-9.

Sill, K. (2007). The macroeconomics of oil shocks. Federal Reserve Bank of Philadelphia, Business Review, 1(1), 21-31.