The Impact of Petroleum and Commodity Prices in a Model of the World Economy

Abstract

The LINK model system augmented by commodity models to make COMLINK is a useful instrument. However, its complexity and the diversity among the component country models make it difficult to evaluate what is happening. This chapter discusses the impact of oil and commodity prices on the gross domestic product ( GDP) of the developed countries (DCs) and the less developed countries (LDCs). The impact of commodity-price increases has been compared with the effect of increases in oil prices. The chapter focuses on business-cycle impacts. A three-block model system of the industrial countries, the commodity-producing non-oil LDCs, and the oil producers to disentangle the impacts have been considered theoretically. The chapter discuses the simulations of the COMLINK system, a world model system adapted from Project LINK, which treats the interactions in ways that are analogous to the simple theoretical system. The additional elements that need to be factored into the global models to allow for the full effect of increases in commodity and oil prices have been considered.