external shocks

Question 1

introduction

Answer 1

The UK is an open economy, one that is highly integrated within the global economy. From one perspective this increases the sensitivity of our economy to outside events for example a recession or slowdown in key export markets will inevitably have downside effects on demand, output and employment in the UK.

Question 2

What do external shocks effect

Answer 2

AD
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Product markets
Labour markets (employment and wages)
Financial markets (supply of credit and interest rates)
Confidence of individuals, households and businesses.

Question 3

Categories of external shocks

Answer 3

World demand shocks - caused by a rise or decline in spending and confidence abroad.
World supply/price shocks - affects global supply and prices of goods and services e.g recent fall in price of oil.
World financial shocks - occur in the global financial system, such as increased stress in the international banking system or financial markets.

Question 4

Evaluation point

Answer 4

Not all shocks are necessarily negative - there can be positive supply side shocks resulting from new technology, new international trade and investment deals or positive reform.

Question 5

External shocks examples

Answer 5

Global financial crisis (GFC)
Eurozone economic crisis
volatile commodity prices
Chines economic slowdown
international trade and investment deals
currency volatility and pricing changes e.g devaluation
extreme weather events e.g El Nino

Question 6

Global world GDP% of counties adjusted for purchasing power 2015 (how important is a country in external shocks)

Answer 6

1. China (16.86%)
2. USA (16.1%)
3. India
4. Japan
5. Germany
6. Russia
7. Brazil
8. UK (2.35%)
9. France

Question 7

Evaluating an external shock 1

Answer 7

Size of the shock - slowdown is not the same as a recession
Scale of the shock - is it regional e.g EU crisis? or Global e.g oil prices
What are the likely multiplier/ accelerator effects - e.g loss of jobs in steel industry

Question 8

Evaluating an external shock 2

Answer 8

Is the shock temporary or permanent (do they have to adjust)
To what extent is a shock favourable to some, who are the winners?
To what extend can policy respond
Is this response likely to be effective.

Question 9

6 shock absorbers 1

Answer 9

1. Floating exchange rate giving a scope for depreciation - if trade dips and the economy weakens then the exchange rate falls to boost competitiveness.
2. Freedom to set/adjust monetary policy when conditions change e.g the bank of England.
3. Geographically and occupationally mobile/flexible labour force - can change in a fast moving labour market.

Question 10

6 shock absorbers 2

Answer 10

4. Strong non-price competitiveness of domestic businesses - demand is more resilient (quick to recover) to fluctuating economic fortunes.
5. Economies are diversified - counties that rely on, for example, farming, tourism, construction etc, are more at risk from external shock - countries should avoid reliance on a few sectors.
6. Strong fiscal position - e.g Germany went into global financial crisis in a strong fiscal position and used fiscal policy to help them.