RESEARCH Methods - Spain - Essay Example

The supply channels acts on the basis that the crude oil serves as basic input required for production; consequently, increase in the prices will trigger increase in production costs thereby causing companies to have decreased output. The impact can also be viewed from demand-side whereby it affects both investment and consumption. The longer the shock is viewed to last, the stronger the magnitude of its impact on the nations. Apart from the effect on supply and demand, oil price shock also impact foreign exchange and inflation.

This is experienced on the in terms of indirect effect on real economic activity. Considering the above case, this paper makes use of both empirics and theory to determine the impact of the oil-price shock on an open-economy, while considering that the price can be perceived via multiple channels. The paper makes use of three cases for the study, United States, United Kingdom and Spain. The three matches the key features of the expected data most suitably. Spain is considered for this case because it is a net importing country hence can help determining the resultant effect of oil price shock.

From this, the resultant model is used to explore the significance of oil price changes on GDP, Inflation and Trend Growth. However, our findings significantly differ from the already established literature. Most importantly, the research finding indicates that observed increase in oil prices affects the macro-economy through the supply side. This is in contrast to Hamiltons’ study of 1988, which pinpointed the demand side (Hamilton & Muns, 1988, 67). In which case, our study purports that increase in oil prices affect similarly on the negative given that higher oil prices will result to decrease in output of a firm on the basis of value-added evident in capital or labor.

Additionally, the study indicates that higher