As gas prices decrease, the GDP decreases
In the United States petroleum industry, the sole factor of production is capital, specifically gasoline. Following the 6.3 percent decrease in wholesale gasoline prices, food prices consequently dropped 0.2 percent since October of 2014. The Federal Reserve has set an estimate number for target producer prices to 2 percent in order to guard against deflation as a result of the decline in prices. In the long-term, if deflation occurs from the decrease in prices of gasoline and food specifically, as seen recently, it could cut back wages, “while leaving debts unchanged, and potentially induce another recession” (The Associated Press, New York Times). For the past two years, deflation has stayed constantly below the 2 percent mark in the United States; the drop in gasoline and food prices could reduce the deflation even more. As a result of the deflation, worker’s hourly pay has risen only 2.1 percent in 2014. This insignificant rise is far below the normal rate for a healthy economy, usually within a rate of 3.5 to 4 percent. Even though income proves subordinate, the savings from essentials such as gasoline and food are temporarily spent on non-essentials, such as Christmas shopping done in December of 2014, briefly raising retail sales. As more money is spent on items such as these, the capital of individuals decrease. Subsequently, with less income, and in return, less money to spend, consumers buy less. Rather than spending exorbitant amounts of money on unnecessary goods and services, consumers are required to purchase only the basic essentials, putting less money into the economy. With less profitability from their product or service, businesses prices and the scope of their products become limited.
The aggregate supply of a country, in terms of economics, is defined as, “the total supply of goods and services that firms in a national economy produce during a specific period of time. It is the total amount of goods and services that firms are willing to sell at a specific price level in the economy” (Boundless). Resulting from the aggregate supply curve, the labor market disequilibrium may shift, creating a negative impact for the amount of supply of a businesses. When a good or service becomes cheaper then consumers are used to purchasing, the disturbance in the amount of inventory within a company will shift the supply curve outward, causing the “equilibrium price in to drop and the equilibrium quantity to increase”. The fixed factor of production in the case of gasoline and food prices decreasing, capital, allows the curve to continue shifting outwards. One of the reasons for this shift includes the new prices for raw materials, causing the short-term curve to shift as well. Since the price of gasoline and food is changing the potential output of businesses and the amount of money they can contribute back into the economy, the long-term aggregate supply is also affected. The changes the short-term aggregate supply establish cause the nation’s GDP to increase while the price of the good or service drops. On the other hand, the long-term supply affects the stabilization of prices, as well as the “price level of the good or service to increase in response to the changes” (Boundless) . As a result of this increase of prices, consumers are able to buy less, therefore negatively affecting the country’s economy as a whole.
Tiffani Hamiltion, Copy Editor | 2015