Macroeconomic Models and Energy Policy Issues* *The authors have benefitted from the discussions of the EMF 7 Working Group as well as from the comments of Howard Borgstrom, Walter Chilman, George Horwich, Thomas Lyon, and Jerome Temchin. However, we retain sole responsibility for the contents of this paper.

Abstract

Publisher Summary This chapter focuses on several critical issues that help to clarify the use of macroeconomic models for oil security issues. In particular, the oil wealth loss that is central to the microeconomic analysis is excluded from real gross national product (GNP) as measured by macroeconomic models. This situation requires a combination of losses estimated from each approach if one wants to measure the full effects of oil price shocks on oil-importing countries. Specifically, the international wealth losses from an oil shock can be added to the reductions in output or real GNP measured by models of the aggregate economy. This result is discussed in the chapter by reviewing some aspects of the national income and product accounts, and the basic accounting framework for macroeconomic models. This framework measures fluctuations in economic output or aggregate production but excludes shifts in relative prices, which are the focus of most energy economists. Under certain conditions, oil wealth losses can be added directly to the real GNP losses.