Oil Price Effects on Economic Growth : A Comparison between the BRIC countries and the Western World  (G7)

Abstract: The purpose of this thesis is to investigate whether economic growth in the BRIC countries (Brazil, Russia, India and China) can be explained by changes in the oil price, with a focus on selected macroeconomic variables. We will also investigate if there are any differences in oil price effects on economic growth between the BRIC countries and the western world (G7). The model used is a Koyck transformation model developed by Leendert Marinus Koyck in 1954, which converts a distributed lag model into an autoregressive model. The data used in this thesis covers 11 countries and their quarterly data for the variables: real interest rate, oil price, US dollar exchange rates and current account (exports-imports), which are all economically and theoretical linked to the dependent variable, real GDP. Our distributed lag model will include past values of real GDP as well as oil price. These explanatory variables will be lagged up to 4 periods, where one period is equal to one quarter of a year.   The findings showed a relationship between oil price changes and economic growth. However there are no consistent results for how the oil price affects GDP, neither for the BRIC countries nor the western countries. Furthermore, in the case of the BRIC countries, the cluster generated divided results: A possible reason for these differences were oil exports/imports. For the western world, oil price changes and economic growth is positively correlated and the reason is probably the already existing oil-dependency. In our model both positive and negative results were found, but also an unknown variable affecting some of the countries. Whether it is consistent in each case needs to be analyzed further. From the findings and previous research one can conclude that there are no certain results of how oil price changes affect economic growth.