basis of 1963=100, and the oil price index is calculated from the posted price of Saudi Arabian light (34°) crude oil FOB Ras Tanura, a representative example.

Sources: Data on food and manufactures, United Nations Monthly Bulletin of Statistics; index of oil prices constructed from data published in International Crude Oil and Product Prices, Parra, Ramos & Parra,

It can be seen from the indices above and the graph below that in certain years through 1970 petroleum declined slightly in purchasing power relative to food and manufactured goods, just as those goods lost their relative purchasing power in some years. By 1971-2, oil prices were relatively on par with the prices of food and manufactures on a historical basis.

The recent, sharp increases in oil prices rapidly compensate for any losses in the purhcasing power of exported petroleum in earlier years. The argument that high oil prices are justified to recoup losses can as logically be applied in reverse, i.e. to support an early reduction in oil prices.

INDICES OF PRICE TRENDS IN OIL, FOOD AND MANUFACTURES

ANNEX

NOTES ON THE MEASUREMENT OF THE INFLATIONARY IMPACT OF OIL PRICE INCREASES

Input-Output Analysis. As noted in the text, our estimates of the impact of oil price increases on wholesale prices were derived from input-output analysis. This technique essentially involves increasing the crude oil flow in the inputoutput tables by the percentage rise in oil prices. This, in turn, gives both the direct and indirect impact of the oil price rise on each sector of the economy. To evaluate the overall impact on the economy, the resulting price changes for each sector-steel, for example--are then aggregated using wholesale price weights. The results correspond to the familiar wholesale price index.

While this gives a fair estimate of the impact on costs of other industries, it assumes rigid relationships between inputs, their relative prices, and final output. This may not be precisely accurate, because the oil price increases have probably brought about dynamic changes in such relationships. This procedure also assumes that cost increases are passed through on a one-to-one basis, another assumption which may not be completely true in practice.

Because of the difficulties in estimating the secondary and tertiary effects on prices, not all of which are positive, the results of input-output analysis should be taken as indicative of the potential size of the initial impact, and a margin of error should be assumed. Also, different assumptions about how the oil price increase is measured and varying time spans used in the analysis will lead to different conclusions.

The prices which have been used here in making estimates by this method have been derived from the Wholesale Price Index, which is believed to be the best indicator of trends in export prices for the industrial countries. It is also the index which most closely corresponds technically to the input-output tables.

Expenditures/GNP Ratio. In its Economic Outlook of July 1974, the OECD published estimates of the impact of higher oil prices on member countries which had been estimated by calculating the ratio of incremental expenditures on oil imports to GNP. These estimates are on the order of 1.5 to 3 percentage points for most industrial countries in 1974, 2.3 percent on average for OECD Europe and 1.5 percentage points for the OECD countries taken together.

While the procedure can be justified as a measure of the increased cost to the economy which must be absorbed, it is essentially a rule-of-thumb method and says nothing about how costs are transmitted through the economy. For this reason, these estimates are believed seriously to understate the actual impact of oil price increases on the general price level.

Index Estimates. A third way of calculating the impact of increases oil prices on the price level is to work directly from the indices themselves. Both the Wholesale and Consumer Price indices include categories for petroleum products at relevant stages of processing. It is possible to compute the impact of price increases in these categories on the corresponding indices as a measure of the impact on the rate of inflation. This procedure is unable to measure the effect on the price increase of other industries, however, and is therefore inadequate.

Best Among Limited Choice. Despite its shortcomings, the input-output procedure is the best means among the choices available for analyzing the effects of the petroleum price increases on the general price level.

Mr. DIGGS. Third, we would also appreciate receiving figures by country and totals concerning the current percentage of GNP used for aid to LDC's, either on a bilateral basis or through multilateral agencies, of OPEC and IEA members.

[The information referred to follows:]

Note: Total flows: DAC (26, 350); OPEC (4,750); central planned economies (1,400); total (32,500). U.S. ODA disbursements of $3,545,000,000 were at highest level since 1964 and accounted for 31.5 percent of DAC total. United States tied with Japan for 12th place in ODA/GNP ratio, with 0.25 percent as compared to 0.38 percent ratio for DAC as a whole.

COMMITMENTS AND ESTIMATED DISBURSEMENTS OF OPEC MEMBERS' CONCESSIONAL AID IN 1974

Note: Figures are subject to revision. In particular, some of the bilateral disbursement estimates are highly tentative. Oil revenue and gross national product figures are Secretariat estimates (except for Iran). Total gross national product and oil revenue refer to the countries listed above, excluding Nigeria.

Source: OECD Development Assistance Directorate Addendum to DD-403 (1st revision) Apr. 23, 1975.

Mr. DIGGS. Finally, we would like to receive an analysis on a per annum basis for the last 5 years of the extent to which oil prices have compared with prices of manufactured goods, fertilizer. and food, and the percentage of increase in the price of each, per year, for the past 5 years, so that we more fully understand how these matters are interrelated.

[The information requested follows:]

WORLD COMMODITY SPOT PRICE INDEX

1 Weighting is based on imports into industrial countries and differs from weights of the same commodities in world production. Fuels and oil are excluded. Source: OECD, Economic Outlook No. 15, July 1974, p. 25.

2 ERS estimate based on prices in International Financial Statistics, International Monetary Fund.

Index of prices for fertilizer paid by U.S. farmers in April and September

(1970=100)

(Prepared by Statistical Research Service of U.S. Department of Agriculture)

1971

1972

1973

1974

1975 (April) –

U.S. price data reflects lifting of domestic price controls in October 1973.

INTERNATIONAL PRICES FOR REPRESENTATIVE FERTILIZER PRODUCTS, 1970-74

[In U.S. dollars per metric ton, f.o.b. supplier's port]

104

106

118

195

244

Note: All price series represent ranges for period, except where "average" is indicated, and reflect export tenders.

Source: British Sulphur Corp., reproduced in IBRD Report No. 446 of May 15, 1974, "Fertilizer Requirements of Developing Countries."