Energy Resources and Potential GNP

Abstract

dramatic change in supply conditions for energy resources since 1973 had a substantial effect on the productive capabilities of the U.S. economy. Higher prices of energy resources, relative to the prices of labor and capital resources, resulted in a loss of economic capacity and higher output prices. It has been estimated that four to five percentage points of both the higher price level and reduction in national output in 1974 were due to the increased scarcity of energy resources entailed by the quadrnpling of OPEC petroleum prices.’ The loss of national output because of energy market developments was a permanent loss. The energy price revision reduced the effective supply of resources available. Thus, the rate of output achievable by fully utilizing the nation’s resources, the “potential” output of the economy, was lowered. Conventional methods of measuring the economy’s potential have focused primarily upon the availability and productivity of labor resources. More recently such efforts have also attempted to account for the availability and productivity of capital resources. Estimates of potential output which consider the relationship of only capital and labor resources to national output are not well suited to the task of accounting for the effects of changes in the availability or cost of energy resources. Nevertheless, the Council of Economic Advisers (CEA) has recently pointed to evidence which indicates that a permanent drop in the productivity of U.S. capital and labor resources may have occurred after 1973. The CEA suggests that this drop is due to the higher cost of energy resources. 2