Macroeconomic Developments and Determination of Commodity Prices - Dissertation Example

Download file to see previous pages Questions related to the determination of prices for oil, another mineral, and agricultural commodities have always fallen predominantly in the province of microeconomics. According to Frankel and Rose (RBA, 2009), there are cases where commodity prices move in the same direction making it difficult to ignore the influence of macroeconomics. Borensztein and Reinhart (1994) confirm the central role of commodity markets, especially with respect to the transmittal of global disturbances through the linkage they (commodity markets) provide between importers and suppliers of commodities. However, the experienced fluctuations in both prices and volumes in recent years call for a deeper re-examination of the underlying macroeconomic variables or factors and their impacts on the commodity markets (Borensztein& Reinhart, 1994). They add that the reason for such deeper re-examination is to enable policy makers to design effective and appropriate policies towards curbing the increasing fluctuations in prices and volumes within the commodity prices.

Fluctuations in commodity prices and volumes are continuously a serious problem within the global arena, particularly in countries that export mainly primary commodities. Such economies might suffer from shocks in terms of trade due to fluctuations in commodity prices and volumes (Borensztein& Reinhart, 1994). Besides, the behavior of commodity prices since the sharp and persistent decline of non-oil commodity prices of the early 1980s raised a lot of concern in a bid to establish the factors that could be behind such fluctuations. Notably, most previous studies with some exceptions link fluctuations in commodity prices to microeconomics. There is evidence that macroeconomic factors could be having a significant impact on such fluctuations, the main question remains, what is the Influence of macroeconomic developments on the determination of commodity prices? This study aims at finding answers to this question.

1.8 Background of the Study
Frankel and Rose (RBA, 2009) provide that there are different historical times associated with fluctuations in both oil and non-oil commodity prices and volumes linked to macroeconomic variables, for instance, the decade 1970s when commodity prices moved in the same direction. It is true that the rise in oil prices can be explained by concepts of “peak oil” fears, risk premium attached to instability as in the vase of the Persian Gulf, or as a result of various developments within the politics of a given economy as evident in Venezuela, Russia, and Nigeria amongst others (RBA, 2009). On the other hand, it is prudent to link droughts and shortages of products to high agricultural prices as evident in China where there were no adequate suppliers, in Australia where there was drought, and in the USA where the ethanol subsidies affected the agricultural prices (RBA, 2009). Despite these explanations, it is important to note that it cannot be a mere coincidence for commodity prices to increase or decrease in several nations all at the same time. ...Download file to see next pages Read More