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Economics of the Business Environment - Base Metals

In: Business and Management

Submitted By ronbans
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U.S. is the second largest importer of base metals after China (Indexmundi.com, 2013). It is the third largest exporter of base metals after China and Germany (Indexmundi.com, 2013). We can make the assumption that this makes U.S. a net importer of base metals.

Base metals are mainly used as (a) input by manufactures producing consumer goods and (b) for infrastructure projects. They themselves are not demanded directly by consumers. If global prices of base metals were to go up, in theory, the U.S. will first see an impact on the "input" side of the economy (figure 7). Production costs will go up and producers will pass this one to the end consumer (P1 to P2). Raw material price increase will shock the supply to shift left (AS1 to AS2) and negative output gap increases (Y1-Y* to Y2-Y*). With increased prices, aggregate demand will go down. The AD curve will shift down (AD1 to AD2). This will result in a fall of real GDP, increase in the negative output gap (Y3-Y*) and prices may fall somewhat to P3.

If there is no supply side change, typically, increases in the negative output gap will cause inflation to go down. The only time inflation increases with increasing negative output gap is when the AS curve shifts left and AD shifts down as well.
To substantiate this, the following data has been presented as below, with main emphasis in the 2007-2008 periods:
1. Figure 8a (Research.stlouisfed.org, 2013 and Databank.worldbank.org, 2013) shows that from around 2008 the U.S. has increasing negative output gap.
2. Figure 8b (Databank.worldbank.org, 2013) shows that around the same time, GDP was shrinking and there was a spike in inflation (consumer prices).

There were different elements at play in this time in the U.S. like the housing market crash and it was the start of an economic downturn, but increased commodity prices made inflation spike…...

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