The Impacts of rising World’s Oil Price on Japan’s GDP, fiscal balance, inflation and trade balance

Running Head: Oil price Rise Impacts
The Impacts of rising World’s Oil Price on Japan’s GDP, the fiscal balance, inflation and the
trade balance
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Oil price Rise Impacts 2
The Impacts of rising World’s Oil Price on Japan’s GDP, the fiscal balance, inflation and the
trade balance
Graph: Japan’s Inflation rate, Real GDP, Trade balance and Fiscal balances
Output/GDP
Trade Deficit (-)
TB0
TB1
Trade Surplus
(+) Trade Balance
Fiscal Balance
Budget -Deficit
(-) Output/GDP
FB0
FB1
Budget +
+Surplus (+)
Y1 Y0 Output/GDP
Aggregate Supply & Demand
AD
I1
I0
SRAS0
SRAS1
Inflation

Oil price Rise Impacts 3
Oil is an essential input in many production activities. Thus, a rise in the world prices will greatly
impacts many importing countries like Japan, whereas it’ll be beneficial to the exporting
economies due to increased foreign earnings. Japan is a major oil importer, it imports nearly all
the oil that is consumed in this nation. The price rise will therefore disrupt the supply for oil.
Demand will also be reduced from the high prices. IEA.org (2018) noted that Japan is
experiencing a structural demand decline. This nation will incur greater costs of production.
Assuming that the Aggregate demand remain unchanged, the reduction in the supply of oil from
SRAS0 to SRAS1, will result in inflation rising from I0 to I1. This will interpret to a fall in real
GDP from Y0 to Y1. Thus it can be concluded that the impact of world oil price will be
inflationary on Japan’s economy.
The reduced GDP will interpret to a fall in the tax revenue the government raises. The high oil
prices have been noted to causes a deterioration of the fiscal balances for net oil importing
nations (Sánchez, 2011). Japan’s fiscal balances has deteriorated as a result. This is represented
by the pivoting down of the FB line from FB0 to FB1. The new line is already indicating a fiscal
balance deficit.
Due to the rise in oil price, there will be a discouragement in its importation. Thus, the trade
balance for Japan rises. The improvement in Japan’s trade balance is represented by the shifting
of the TB line from TB0 to TB1. The line is shifting upward towards the trade balance surplus.
The graphs on the appendices show the changes of various macroeconomic variables for Japan
for the period 2006-2018.