Thursday, July 16, 2009

What are the binding constraints on the economy?

In order to present a simplified view of resource constraints we can compare the swing in nominal prices of various goods over the last few years. In particular, let's use the swing in house prices vs the swing in oil prices using the Frequently Used Charts page. The 11th and 12th charts display the Schiller index and the oil price nominal price over time. Notice the swing in house prices from the baseline of 100 in the Schiller index. The index doubles over the period in question. Look at the swing in oil prices, from a typical $40/barrel to $140/barrel, as swing of about 3.5. So, for the same change in aggregate GDP we see that oil swings almost 1.5 times as far as housing.

In this simplified view, oil is the constraint the bedeviled us, not housing.

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