Explain the impact that a fall in the world price of oil might have on aggregate supply and gross domestic product (GDP) in an economy.

The first key step to answering this type of IB Economics question is to define the key terms. Aggregate supply is defined as total amount of goods and services that producers of an economy are willing to supply at different price levels. GDP is the total value of all goods and services produced in an economy. Secondly, an explanation of the theory should be included, typically referring to a diagram in doing so. A decrease in the world price of oil will make it cheaper to import it for any given country. This means that the cost of production of many domestic firms will decrease. A lower cost of production will allow the economy to increase its aggregate supply as firms are producing more, shown by an outwards shift of the AS curve on a macroeconomic diagram. As a consequence of the AS shift, the equilibrium point where AS intersects AD will be at a lower price level and higher real GDP, meaning that the real GDP of the economy will increase. Normally, a real life example should always be included in IB answers but since this question uses the specific example of oil, it can be skipped.

Answered by Sofia D. Economics tutor

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