... per unit of output in the OECD countries, Australia is less vulnerable to higher oil prices than many other countries as domestic production meets most of its needs (refer to table on the left). In fact, a US$10/barrel increase in the oil price would subtract approximately 0.3% from Australian GDP growth although indirect effects from slower major trading partner growth would also impact negatively on growth.5 However, these changes in the price of oil nevertheless have an effect on the Australian economy. Both the AS/AD and AE models of the economy shed some light on what effect of the increase on oil prices has on the domestic economy, but a more complete understanding of the effects is achieved if both models were used in conjunction. The AS/AD model will firstly be used to illustrate the effect of the decrease in AS on the domestic economic equilibrium. The AE model will ...

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