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Macro Econ: Low gas prices -> higher disposable income -> higher spending / GDP?
Posted on 2/18/15 at 9:53 pm
Posted on 2/18/15 at 9:53 pm
In the Macro injection-leakages world, the typical Marginal Propensity to Consume (MPC) in the US is assumed to be 0.9, i.e. the average American usually spends $0.90 of every extra dollar of disposable income. The MPC for increased wealth I believe is only 0.05.
Consumption = C = Ca + c (Y - T)
Ca = Autonomous spending independent of income
c = MPC
Y = Income
T = Taxes
Y-T = Disposable Income
If people suddenly have more cash left over at the end of every month because they are not spending it at the gas station, would you consider it increased disposable income (Y-T) or increased wealth? If it is increased disposable income and people are spending all this money on other things ($0.9/$1.0), do you think it it is increasing US GDP? Seeing as how less of US income is now leaking out of the US to import oil from OPEC countries (increased domestic production post-fracking) and that income is now available for domestic spending, this is another net positive for the US GDP. Agree or disagree?
Cliff's: Low oil prices is a net positive for US GDP. Agree or disagree?
Consumption = C = Ca + c (Y - T)
Ca = Autonomous spending independent of income
c = MPC
Y = Income
T = Taxes
Y-T = Disposable Income
If people suddenly have more cash left over at the end of every month because they are not spending it at the gas station, would you consider it increased disposable income (Y-T) or increased wealth? If it is increased disposable income and people are spending all this money on other things ($0.9/$1.0), do you think it it is increasing US GDP? Seeing as how less of US income is now leaking out of the US to import oil from OPEC countries (increased domestic production post-fracking) and that income is now available for domestic spending, this is another net positive for the US GDP. Agree or disagree?
Cliff's: Low oil prices is a net positive for US GDP. Agree or disagree?
4
Posted on 2/18/15 at 10:05 pm to euphemus
Intuitively, that makes sense on the surface. The other side of the coin is that lower oil prices may, as the Fed puts it, establish a new "retrenchment" of employment in the O&G industry, after the positive effects of increased consumer spending have been exhibited. The energy industry has been immensely important for the domestic economy since the financial crisis.
Posted on 2/18/15 at 11:02 pm to euphemus
Far too many moving parts to make this assessment.
The potential increase in employment in the service industry (likely destination for new spending) may not offset the loss in employment in the energy sector. Especially when considering tax revenue.
I do agree that our decrease in imported oil is a net positive.
The potential increase in employment in the service industry (likely destination for new spending) may not offset the loss in employment in the energy sector. Especially when considering tax revenue.
I do agree that our decrease in imported oil is a net positive.
Posted on 2/19/15 at 2:52 pm to Oenophile Brah
Eventually that may be the case.
Posted on 2/19/15 at 3:17 pm to bobaftt1212
the economy as whole it may be net positive, however economies like Texas and Louisiana will take significant hits as the energy sector plays such a big role in their economies.
Posted on 2/19/15 at 3:24 pm to euphemus
I read an article in the WSJ a month or so back that compared the effect of $40 oil on different GDPs. While it crushes countries like Russia and Saudi Arabia, the U.S. GDP grows the most significantly. Obviously can't link a paid article, but there's similar stuff out there with opposing views
Posted on 2/19/15 at 3:33 pm to AlexLSU
Mining is only about 2% of US GDP.
In TX, OK, LA it's closer to 15%. I can understand the debate for our region, but nationally it's essentially a huge no-strings-attached tax break. Win for the US economy as all that money goes on new houses, cars, electronics, CPGs, etc. etc.. Potential slowdown/recession for the south central U.S.
In TX, OK, LA it's closer to 15%. I can understand the debate for our region, but nationally it's essentially a huge no-strings-attached tax break. Win for the US economy as all that money goes on new houses, cars, electronics, CPGs, etc. etc.. Potential slowdown/recession for the south central U.S.
This post was edited on 2/19/15 at 3:35 pm
Posted on 2/19/15 at 4:58 pm to TejasHorn
quote:
Win for the US economy as all that money goes on new houses, cars, electronics, CPGs, etc. etc.
More money to spend on Play Stations instead of Gas Stations? I will take that.
This post was edited on 2/19/15 at 4:59 pm
Posted on 2/19/15 at 7:42 pm to euphemus
quote:
Seeing as how less of US income is now leaking out of the US to import oil from OPEC countries (increased domestic production post-fracking) and that income is now available for domestic spending, this is another net positive for the US GDP.
Except that the lower oil prices will affect domestic production more than OPEC production (which has lower F&D and lifting costs as well as state-run oil companies who need production to remain at certain levels for revenue purposes). One of the main reasons why we have become much more energy independent in recent years is that the high oil prices have supported relatively high-cost domestic drilling & completions here in the US. If these low prices are sustained for several years, the net effect will be that the US loses its recent gains in energy independence and imports more foreign (ie lower cost) oil.
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