Hi Brandon

If Iraq tension escalates and causes a significant increase in oil prices, what impact will this have on Australia economic activity?

Oil is an important aspect to any economy as it is both used by consumers but also businesses as an ‘input’ of production. Firstly, the impact on domestic stability will be that economic growth would most likely fall as oil is an ‘inelastic good’ and consumers would simply continue to demand such levels and hence would reduce in other areas reducing the volume of finished goods and services (other than oil) needed reducing GDP growth below the goal of 4-4.5%. It would influence unemployment cyclical as the level of demand would reduce and such we could expect to see unemployment increase and the participation rate decrease as there is simple not enough demand in our economy. Furthermore, it would increase cost push inflation, this is because oil is an important aspect used on many production lines and even by any business in company cars etc. if this price was to increase it means the cost of production would increase, this cost would then be placed onto consumers and such would rise see inflation increase within our economy above the goal rate of 2-3% over the medium term. Currently we have an oil price in our economy which has seen headline inflation hit 4% (and now back down to 3.9%) and underlying inflation hit 2.9%. Therefore, the impact of increasing oil prices due to restricted supply from Iraq would have a negative impact on domestic stability as it is an imported good.

*proud*


VCE-RAWR

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