PS3 - Siddharth Joshi Global Econ 8a Economics Problem Set...

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Siddharth Joshi Global Econ 8a Economics Problem Set 3 1 a. I chose a natural resource, Crude oil , which had a drop in price from 1998-2000 and one from 2002-2004 before skyrocketing to its current price, which is still rising. In theory, oil discoveries or increase in oil production could decrease its price, according to immiserizing growth, expanding a country’s ability to make the products that it exports can actually make the country worse off because of a fall in the world price. The reality supports this to some extent although crude oil is a complicated, politically charged product. In reality, the 1998-2000 drop in price was because at that time Iraq begins exporting oil under United Nations Security Council Resolution 986. OPEC raised its production ceiling by 2.5 million barrels per day to 27.5 million barrels per day. Which was the first increase in 4 years. World oil supply increases by 2.25 million barrels per day in 1997, the largest annual increase since 1988. Oil prices continue to plummet as increased production from Iraq coincides with no growth in Asian oil demand due to the Asian economic crisis and increases in world oil inventories following two unusually warm winters. This turned around when OPEC pledged additional production cuts for the third time in 1998. Total pledged cuts amount to about 4.3 million barrels per day. This helped oil prices triple between January 1999 and September 2000 due to strong world oil demand, 1
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Siddharth Joshi Global Econ 8a OPEC oil production cutbacks, and other factors, including weather and low oil stock levels. In reality, the 2002 drop in price was because oil prices declined sharply following the September 11, 2001 terrorist attacks on the United States, largely on increased fears of a sharper worldwide economic downturn (and therefore sharply lower oil demand). OPEC oil production cuts, unrest in Venezuela, and rising tension in the Middle East contribute to a significant increase in oil prices in 2004. This has continued to rise to due to tensions with Exxon and Venezuela and the world credit situation being the way it is. Coffee growers face similar immiserizing growth. For the period 1998-2001, there was an increase in coffee production and the surplus coffee quantity went from 6.5 million to 10.8 million bags of coffee. This increase in ability to produce coffee caused the prices to drop. Surplus coffee leads to further drop in prices. 2
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Siddharth Joshi Global Econ 8a b. Terms of trade graph: A country’s terms of trade is the relationship between the prices at which a country sells its exports and the prices paid for its imports. If the prices of a country's exports rise relative to the prices of its imports, one says that its terms of trade have moved in a favourable direction, because, in effect, it now receives more imports for each unit of goods exported. In the last 5 years, the USA’s terms of trade have worsened, and moved in an unfavourable direction. This is because now they receive less imports for each unit
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This note was uploaded on 04/17/2008 for the course ECON 8b taught by Professor Zamb during the Winter '08 term at Brandeis.

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PS3 - Siddharth Joshi Global Econ 8a Economics Problem Set...

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