Chapter 5 Economic Indicator

http://economics.about.com/od/inflationanddeflation/a/cpi_2004_sept_4.htm

Summary:

The article I read is about the relationship between oil prices and inflations by Mike Moffatt. The article suggest that the theory of oil supply running out does not hold entirely valid. Theoredically, oil prices are based on two factors;the number of barrels we can extract with existing technology ( supply) and the number of barrels used worldwide in a year ( demand). Yet, it is the existing technology that is limiting the supply of oil. Hence, the article suggest that There will still be oil in the ground 10 years 50 years or 500 years from now depending on if we take a pessimistic or optimistic view about the amount of oil still available to be extracted. Furthermore, the article state that due to the depleting supply of avaliable oil and the increase in it demand because of the growing population, it causes inflation in the oil prices. However, this inflation is a natural change as compared to the oil crisis in 1970. The hyper inflation in 1970 was caused by oil producing nations deliberately cutting back on production in order to raise the world price. The current situation is a slow natural decline in the supply of oil due to depletion so we won't see huge increases in the consumer price index.

Connection:

I believe the connection of this article to our text is inflation. In the article, it states that inflation is caused by the decrease in avaliable supply and the increase in public demand. in terms of our text, these two factors are known as demand-pull inflation, and cost- push inflation. In a demand pull inflation, the demand for a product increase due to factors such as: increased income and changing expectations. These factors shift the demand curve to the right causing an increase in price. In a cost push inflation, it is anything that causes supply to decrease and the factors that causes it are: wage increases, tax increases, depletion of raw materials and energy sources. these factors shift the supply curve to the left resulting an increase in price. In terms of oil price inflations, both factor plays a role. Because of the depleting supply of avaliable oil, the production cost of oil increases and this cost is passed down to the consumers causing an increase in oil price. This is an example of cost- push inflation. Moreover, becasue the world population is growing, the demand for oil will increase. In addition, we suspect that future oil prices will be even greater. Hence, we are more likely to purchase the neccessary goods and service now. This is an example of demand pull inflation. However, the current inflation will not become a hyperinflation like that of the 1970 oil crisis for this inflation is natural whereas the 1970's was caused by oil producing nations deliberately cutting back on production resulting prices to soar.

Reflection

I agree that the current over all inflation price is acceptable. However, I disagree with the governments action over removing petrolium oil from the basket of goods. The basket of goods is suppose to be a representation of what the average Canadian uses. In Canada, oil is an important product that most Canadians use. If such a high percentage of Canadians uses oil, it should not be disregarded in the Consumer Price Index. It makes me wonder if the government are removing this product because there is a need for such a purpose or is it because they want to adjust the numbers on the CPI so that average consumers will not be shocked by the inflation rates? I also learned that the consumer price index has its shortcomings for it is a representation of retail prices not the cost of living. But because it is impossible calculate the cost of living in terms of every individual, we use CPI as a reference for no other cost of living standard is avaliable. If the government purposely takes out certain products from the basket of goods for the sake of adjusting the numbers, it will make CPI even less accurate and what is deem to represent the average consumer will be misrepresented.