Working Paper: NBER ID: w0658
Authors: Paul 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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Oil price decontrol (Q31) | Reduction in oil imports (Q37) |
| Reduction in oil imports (Q37) | Real appreciation of the dollar (F31) |
| Oil price decontrol (Q31) | Real appreciation of the dollar (F31) |
| Real appreciation of the dollar (F31) | Improvement in US terms of trade with other oil-importing countries (F14) |