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Energy Prices, Capital Formation, and Potential GNP

A common theme of the rapidly developing literature on energy-economy interaction is that higher energy prices-initiated by external events such as OPEC-will permanently reduce the growth potential of net energy-importing economies even if full-employment conditions are maintained. According to this literature, in the absence of government measures to encourage saving and investment any initial adverse effect on the economy's real income at full employment (hereafter referred to as potential GNP) resulting from the need to pay a higher real price for imported energy will be compounded by secondary effects that reduce the rate of capital formation. This secondary or reverse feedback effect through capital may be the largest component of the overall impact on potential GNP.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Energy prices, Capital formation, potential GNP, Energy-economy interaction

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-1

Published in Volume 5, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.