High Interest Rates And Low Oil Prices example essay topic

Extract The Venezuelan economy is experiencing a recession. The recession has hit the industries the hardest. One company named Construcentro, similar to our Home Depot, was planning on opening thirteen new stores by the year 2000. They will certainly not achieve that goal and they may have to also close down other existing stores because of a forty- percent drop in sales. The effects of the recession are already very evident with the closing of fifty medium and large manufacturing companies.

Food consumption is down twelve percent, and gas consumption is down twenty percent. Also the Venezuelan steel industry is struggling because of the sliding economy and low world steel prices. High interest rates and an overvalued bolivar have made many exported good less competitive and reduced consumer spending. Commentary The economy in Venezuela is experiencing a recession or a decline in gross domestic product for two consecutive quarters. High interest rates have decreased the consumer income for people in Venezuela.

A decrease in consumer income lowers the demand for certain products. The effects of lower consumer spending are very evident in the industries such as the automobile, steel, and oil. The recession has been blamed upon high interest rates and low oil prices. Therefor one solution would be to raise oil prices As price increases the demand for an item decreases. Even though the demand decreases, oil is a relatively inelastic product, meaning that a change in price has little effect on consumer demand. Gasoline is thought of as a "necessity" in the American culture, and therefor a small increase in price would only create a small decrease in demand.

Although the demand for oil would decrease, the total revenue gained from sales would still be greater than before the price change (The total revenue is equal to the price times output sold). The effects of this change would be felt in the United States as well as Venezuela. Venezuela is a leading exporter of oil to the United States. An increase in the cost of oil would in turn increase the cost of gasoline around the world.

A disadvantage to this solution would be higher gasoline prices. Another solution to the recession would be to lower interest rates. Lower interest rates transfers into a higher consumer income. When the consumers have more money, they spend more money and help stimulate industry. The decline in sales in the stores around Venezuela appears to be more connected to the higher interest rates than the low oil prices.

Lower interest rates would most likely hurt the country in the long run and add to its growing deficit. One of the industries that is really feeling the economic recession is the steel industry. The recession along with lower world prices for steel have led to a thirty-four percent drop in sales An improvement in the technology in the steel production industry would increase the supply (see chart 2). Although the price of steel would decrease from this the demand could be increases dramatically. There are little disadvantages to an improvement on the steel making process, and therefor I believe that it is a good solution. The only real disadvantage is that it is often hard and expensive to improve the technology in a company, and along with a recession this solution would be very difficult to impose.

Of the solutions that have been offered, I think that a combination of raising oil prices and lowering interest rates would work the best to help improve their economy. Vogel, Thomas T. JR., (3/3/1999), Recession takes a Dear Toll in Venezuela, Wall Street Journal, Page A 15.