A model for teaching oil shocks in a small, open, oil-exporting, and developing economy

Undergraduate Macroeconomics materials, usually written from the perspective of developed economies, teach that oil price shocks inversely affect equilibrium aggregate demand and output. However, in the context of a small, open, oil-exporting, and developing economy, these outcomes may not always hold true. Thus, this paper presents a model designed for use in undergraduate Macroeconomics and/or Development Economics courses focused on such economies. While drawing primarily from Colombia’s case, its general arguments may have broader applicability. To enhance its educational value, one author has prepared a companion resource with exercises for students, complete with detailed answers.