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Real Exchange Rate Adjustment and the Welfare Effects of Oil Price Decontrol

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  • Paul R. Krugman

Abstract

Conventional analysis of the welfare effects of U.S. oil price regulation in the 1970's focuses on the deadweight losses in the oil market. This paper argues that such analysis substantially understates the benefits from decontrolling prices, because decontrol will lead to an improvement in the U.S. terms of trade with respect to other oil importing countries. A simple model of the relationship between oil decontrol and the terms of trade is developed, and the impact is calculated for plausible parameter values. The results suggest that the terms of trade benefits are several times larger than the benefits as conventionally measured.

Suggested Citation

  • Paul R. Krugman, 1981. "Real Exchange Rate Adjustment and the Welfare Effects of Oil Price Decontrol," NBER Working Papers 0658, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0658
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    References listed on IDEAS

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    1. Samuelson, Paul A., 1971. "An exact Hume-Ricardo-Marshall model of international trade," Journal of International Economics, Elsevier, vol. 1(1), pages 1-18, February.
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    Cited by:

    1. J. A. Stockfisch, 1982. "The Income Distribution Effects Of A Natural Gas Price Increase," Contemporary Economic Policy, Western Economic Association International, vol. 1(1), pages 9-26, October.
    2. Bruna, Karel & Van Tran, Quang, 2023. "Asymmetric effects of oil price shocks on EUR/USD exchange rate and structural shock decomposition in a BVAR model with sign restriction," Energy Economics, Elsevier, vol. 128(C).

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