The basic macro‐economics of oil economies

Abstract

Focussing on the rentier aspects of an oil economy, where the rent accrues in foreign exchange, this paper constructs a simple Keynesian model of a typical oil economy. Increases in oil‐financed government expenditures in the short run, are shown to raise the general price level and the relative price of non‐tradables. Sustained increases in oil‐financed government expenditures are shown to result in an economy whose structure resembles that of the present day oil economies.

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