ABSTRACT
The development of the oil and gas sector affects the economy in three main ways. It consists of the things as the contribution of oil and gas to the gross domestic product, the balance of payments effect, and the direct employment effect. This chapter looks at the exchange rate mechanism through the oil sector which has two links. The first determines the exchange rate itself; the second is the effect of the exchange rate on the macroeconomy. The chapter also deals with the important link between North Sea oil and the macroeconomy via the tax revenues generated in the oil sector and the use to which the government puts them. The traditional approach of postwar governments has been to aim at four goals: economic growth, stable prices, full employment and a satisfactory balance of payments. If the government runs a conventional deficit of 15,000 million it replaces the hidden taxation and a neutral budget will be achieved.
