The simple macroeconomics of an oil-dependent economy

This paper constructs and analyzes a simple macrodynamic model of a small economy that is completely dependent upon OPEC for oil imports. The impact and dynamic behavior of wages, prices, output and exchange rates is analyzed under several alternative scenarios. Initially, it is assumed that oil is denominated in dollars and the consequences of an increase in oil prices are investigated under a system of free floating. In later sections, the effects of this disturbance are re-examined under various kinds of ‘managed float’ systems.